Before the Bell: Fed caution, AI headlines, and sector rotation

Introduction#

U.S. equities faded into the final session of the year on Tuesday as investors digested a more cautious Federal Reserve tone and thin holiday liquidity. According to Monexa AI, the S&P 500 (^SPX) closed at 6,896.24 (-0.14%), the Dow Jones Industrial Average (^DJI) at 48,367.06 (-0.20%), and the Nasdaq Composite (^IXIC) at 23,419.08 (-0.24%). Market breadth was mixed, with modest gains in the NYSE Composite (^NYA) and a rise in volatility gauges into the close. Overnight, a firmer U.S. dollar followed the latest Fed minutes, which underscored hesitation around further near‑term rate cuts, a development reported by Reuters. Asian equity tone was constructive at the margins—Hong Kong indices capped their best annual gain since 2017 on AI-fueled tech strength, as noted by Bloomberg—but the macro signal into the U.S. open remains one of mild caution.

AI remained the dominant corporate storyline overnight. Multiple outlets highlighted new details and implications around NVIDIA’s non‑exclusive licensing tie‑up with Groq—an agreement that brings key Groq leaders to NVDA while leaving Groq’s platform independent—framed in company statements and coverage by Groq and Reuters. Separately, Reuters also reported that NVIDIA sounded out TSMC on additional H200 orders to meet China demand, a headline that keeps supply‑chain execution in focus heading into 2026.

Market Overview#

Yesterday’s Close Recap#

Thin trading volumes and a more hawkish‑than‑hoped Fed tone defined the final Tuesday of 2025. According to Monexa AI, all three major U.S. indices finished lower in holiday‑light activity. The CBOE Volatility Index (^VIX) moved higher into the close, while the CBOE Russell 2000 Volatility Index (^RVX) also firmed, consistent with a modest de‑risking bias.

Monexa AI’s tape analysis shows volumes well below typical levels for late December. The S&P 500 traded roughly 1.73 billion shares versus an average of about 5.22 billion, the Dow handled roughly 283 million versus 514 million on average, and Nasdaq volumes were also subdued at roughly 6.14 billion versus a 9.29 billion average. With liquidity thin, sector and single‑name moves were disproportionately driven by headlines, positioning, and late‑year tax‑management flows rather than fundamental catalysts.

Heatmap diagnostics from Monexa AI indicate a market still in rotational churn. Technology breadth skewed softer into the close, dragged by mid/small‑cap hardware and software, while select mega‑cap platforms provided ballast. Energy and defensives flashed relative resilience, though as discussed below, there is a discrepancy between breadth indicators and sector‑level close prints that investors should note.

Overnight Developments#

The dollar firmed after the Fed minutes signaled caution on additional near‑term rate cuts, lifting the greenback to a one‑week high, according to Reuters. Hong Kong stocks logged their strongest annual performance since 2017 on ongoing AI enthusiasm, per Bloomberg, reinforcing how the AI investment cycle continues to shape cross‑border tech capital flows. On the corporate front, Reuters reported NVIDIA explored boosting H200 output at TSMC to satisfy surging China demand; any tightening of export compliance or supply‑chain bottlenecks would remain a key watch item into early 2026. Beyond semis, the global trade regime continues to rewire under elevated tariffs; Monexa AI’s overnight newswire highlighted case studies of how multinationals and smaller U.S. operators have adapted to a high‑tariff world, adding nuance to the corporate cost and pricing outlooks investors are modeling for 2026.

Macro Analysis#

Economic Indicators to Watch#

Rate expectations were the primary macro lever in the prior session. The latest Fed minutes depicted a committee still divided about the pace and timing of further easing after December’s cut, with multiple dissents and explicit acknowledgement of inflation and labor‑market risks persisting. That split—summarized across multiple Reuters headlines—was sufficient to nudge Treasury yields and the dollar higher and to clip growth‑sensitive equity cohorts into the finish. With no pre‑market data available and holiday calendars constraining today’s tape, the near‑term setup into January is about labor data, inflation prints, and early corporate updates converging on the path of 2026 policy. The minutes have recalibrated the market’s probabilities around the cadence of cuts, biasing the opening tone toward patience rather than urgency.

From an equity‑factor standpoint, a firmer dollar and stickier real yields typically suppress long‑duration growth premiums and favor cash‑flow‑generative defensives and commodity‑linked cyclicals. Yesterday’s close largely reflected that pattern: high‑beta tech and small/mid‑cap software trailed; select energy, utilities, REITs, and a handful of large‑cap platforms with strong cash profiles outperformed on a relative basis.

Global/Geopolitical Factors#

Trade architecture remains a swing variable. According to Monexa AI, several overnight features chronicled the practical reshaping of supply chains and pricing power under elevated U.S. tariffs. The implications are straightforward for asset allocators: pricing power migrates to companies with proprietary product and distribution moats, and capex efficiency becomes a prime differentiator for manufacturers and distributors navigating tariff‑window uncertainty. At the margin, that favors select consumer defensives with brand strength and globalized procurement, as well as domestic reshoring beneficiaries in industrial technology and defense. Meanwhile, Asia’s AI‑led equity resilience—highlighted by Bloomberg—supports the thesis that the AI capex super‑cycle remains global, even as U.S. policy debates and export regimes continue to dictate the pace and mix of next‑generation chip deployments.

Sector Analysis#

Sector Performance Table#

According to Monexa AI’s sector performance classification at the close, results were mixed with narrow dispersion across the tape.

There is a notable discrepancy between sector‑level close prints and intra‑sector breadth captured by Monexa AI’s heatmap diagnostics. Breadth showed Technology modestly negative on the day amid softness across mid/small‑cap hardware and services, while the sector table above clocks a +0.05% close for Technology. Similarly, breadth flagged Energy as a leader with gains across OXY, FANG, DVN, SLB, and COP, yet the sector table records Energy at -0.21%. We prioritize the sector table for end‑of‑day index closes and treat breadth as a complementary gauge of underlying flows. The divergence likely reflects differences in cap‑weighting, sub‑industry mix, and measurement windows. The practical takeaway: breadth suggested risk rotated into commodity and defensive yield pockets even if cap‑weighted sector indices didn’t fully capture that rotation at the closing print.

Narratively, Communication Services benefited from strength in mega‑cap platforms, with META advancing and GOOGL/GOOG slightly positive, offsetting weakness in streaming and delivery‑adjacent names as NFLX and DASH lagged into the bell. Technology’s leadership was steadied by mega‑cap resilience—MSFT was roughly flat to slightly positive—while NVDA drifted lower into the close and several mid‑cap software and services names underperformed. Financials weakened on the day, with pressure in asset managers such as ARES and BEN, though insurance proxies like BRK-B posted relative strength.

Company‑Specific Insights#

Earnings and Key Movers#

The overnight and prior‑close corporate slate skewed toward estimate revisions, rating changes, and AI‑related strategic updates rather than hard earnings prints.

NVIDIA’s inference push remains the marquee theme. As detailed by Groq and covered by Reuters, the non‑exclusive license of Groq technology—combined with senior Groq talent joining NVDA—signals a practical expansion of NVIDIA’s inference capabilities without a full IP acquisition. Sell‑side commentary captured by Monexa AI echoed that view: Wells Fargo reiterated an Overweight on NVIDIA, and BofA maintained Buy, arguing the arrangement broadens NVIDIA’s solution set for latency‑sensitive workloads. The Wall Street Journal separately noted NVIDIA’s deeper cloud push with a GPU marketplace to streamline enterprise access to compute (WSJ, while the Financial Times spotlighted industry‑wide competition and price‑performance pressure across inference hardware (FT. Monexa AI’s company newsflow also cited Reuters reporting that NVIDIA sounded out TSMC on H200 capacity to meet stronger‑than‑expected China demand, reinforcing supply/demand dynamics into early 2026.

In software infrastructure, DDOG drew supportive research commentary. According to Monexa AI’s research digest, MoffettNathanson reiterated Buy with a $255 price target, characterizing the stock’s post‑peak pullback as a mispricing given continued acceleration in AI‑native workloads. The setup into 2026 hinges on whether budget flush and early‑year IT planning unlock re‑acceleration in consumption; for now, the call is that fundamentals outstrip performance.

Health care saw idiosyncratic recalibration rather than sector‑wide trends. Bernstein reaffirmed Outperform on GILD with a $135 target, citing confirmation that Medicaid pricing risk is narrower than feared and largely limited to specific products. By contrast, the firm cut its target on LW to $46 and flagged second‑half FY26 EBITDA pressure. Monexa AI’s overnight feed captured both moves and noted that the Lamb Weston guidance implies a tougher margin path into 2027, a potential overhang until execution evidence improves.

In consumer, UBS reiterated a Neutral on NKE despite better brand indicators, noting the turnaround timeline remains longer than the market wants to see. The sector’s near‑term narrative is also being shaped by expectations that January becomes a forum for earnings “resets” where management teams sand down the edges of 2026 guidance; one commentary circulating in the Monexa AI wire flagged LULU specifically amid mounting management pressure and fresh boardroom dynamics late in the quarter.

Defense and government IT delivered a mixed tape. BofA cut its price target on PSN to $90 after the company lost a large FAA integration contract to Peraton, highlighting a broader “software‑first” tilt in government procurement. That pivot underscores how digital capabilities are increasingly the wedge in competitive awards, a trend that could re‑rate multiples across government services names as investors reassess pipeline quality.

In industrials and AI‑hardware adjacency, INTC was a relative outperformer into the close, aided by chatter about 18A process traction and capacity additions for 2026. While headlines oscillate between caution and optimism, Monexa AI’s heatmap flagged INTC as a notable positive outlier within semis. Elsewhere in cyclicals, TSLA eased, acting as a drag on consumer cyclicals, while AMZN steadied the group as a large‑cap counterweight. Select discretionary names like DECK rallied, while housewares and home‑exposed retailers such as WSM slumped.

Energy and utilities presented a defensive‑cyclical barbell. Despite the sector table showing Energy at -0.21%, breadth was positive in upstream and services, with leadership from OXY, COP, SLB, and FANG. Utilities saw steady interest in yield proxies such as NEE, EXC, and PCG. Real estate outperformed on the close print, with data‑center and storage REITs like EQIX and DLR leading, consistent with the secular AI‑infrastructure theme.

Financials remain a bifurcated story. JPM and other large banks were fractionally lower, while alternatives managers and asset‑gatherers like ARES and BEN underperformed more meaningfully. Defensive insurance exposures, including BRK-B and AFL, offered ballast. For trading‑exposed fintech, HOOD retreated alongside a small pickup in volatility.

Finally, crypto‑adjacent equities remained bifurcated into year‑end. Monexa AI’s overnight wrap highlighted that “operators” with power and data‑center tie‑ins outperformed in 2025, while balance‑sheet‑heavy plays lagged amid dilution and financing costs. That framework favors miners with clear power strategies such as RIOT and infrastructure‑focused operators over pure Bitcoin beta proxies.

Extended Analysis#

The immediate setup before the bell is about reconciling three forces that rarely align neatly: policy signaling, factor rotation, and idiosyncratic catalysts. The Fed minutes pushed back against an aggressive early‑2026 rate‑cut path, lifting the dollar and nudging real yields. That tends to compress multiples for long‑duration assets and refocuses attention on cash‑conversion and balance‑sheet quality. If factor flows keep leaning that way, expect persistent, if measured, demand for defensives (staples, utilities, parts of health care) and selective cyclicals that benefit from commodity strength and reshoring policy.

Within Technology, the leadership handoff from pure training cycles to latency‑sensitive inference stays front‑and‑center. The Groq licensing arrangement confirms that NVDA is willing to broaden its hardware/software toolkit to optimize for inference cost and performance, not just training throughput. That is a defensible hedge against the proliferation of rival accelerators and in‑house silicon at hyperscalers. The WSJ noted NVIDIA’s cloud marketplace strategy, which reduces procurement friction for enterprises, while the FT underscored a maturing competitive field. Investors should view the inference land‑grab as a mix‑shift story: if inference scales faster than training and carries a different margin profile, models that don’t differentiate between the two risk underestimating the volatility of gross margins as the product set evolves.

Energy’s breadth‑strength despite a negative sector close print is not a contradiction; it is a reminder that cap‑weighted sector indices can hide important sub‑industry variation. The names that led breadth—OXY, COP, SLB, FANG—are precisely those levered to upstream investment and services pricing. If crude holds or tightens on supply dynamics, those cash‑return narratives will likely keep drawing flows, particularly in a stronger‑dollar regime where domestic producers and service providers can still compound via buybacks and disciplined capex.

In Financials, alternatives’ underperformance—ARES, BEN—should be read alongside rising volatility and a firmer dollar. Funding costs and performance fee visibility tighten in that backdrop, while insurers and diversified financials like BRK-B hold their bid on balance‑sheet strength and underwriting stability. For banks, 2026 will turn less on NIM and more on credit quality and capital return; yesterday’s fractional weakness reflects a lack of new information rather than an outright change in thesis.

Consumer remains two‑speed. Category winners with innovation and distribution—DECK—are still getting paid, but home‑exposed and big‑ticket discretionary remain vulnerable to any incremental tightening in household liquidity, as seen in WSM. Staples, meanwhile, are inching back as a haven for yield and pricing power, with CLX and STZ leading breadth even as megacaps WMT and COST cooled.

The REITs/data‑center complex—EQIX, DLR—remains a direct derivative of AI infrastructure intensity. If inference workloads proliferate, the demand for low‑latency interconnect and high‑density power will continue to pull capital into these platforms. That, coupled with any stabilization in rates, is a constructive backdrop for the group.

Conclusion#

Morning Recap and Outlook#

Heading into Wednesday’s open, the dominant catalysts are straightforward. First, the Fed minutes—summarized by Reuters—have tamped down hopes for an early rush to cuts, firming the dollar and skewing flows toward defensives and cash‑rich cyclicals. Second, AI continues to dictate microstructure, with NVIDIA’s Groq arrangement and reported H200 demand keeping the inference narrative front‑and‑center. Third, the tape remains liquidity‑sensitive into a holiday‑thinned finale, which exaggerates sector divergences and single‑name volatility.

Actionably, that means respecting the defensive‑cyclical barbell while being selective in Technology. In semis, NVDA news flow is constructive for the medium term, but day‑to‑day price action remains sensitive to rate‑path recalibrations; pairing mega‑cap exposure with relative‑strength incumbents like INTC can dampen factor volatility. In Energy, the breadth leaders—OXY, COP, SLB, FANG—still screen as beneficiaries of commodity‑linked cash returns. In defensives, look where pricing power and balance‑sheet quality overlap—select consumer staples and utilities—and within REITs, focus on data‑center capacity and power economics.

With earnings warning season in the air and management teams poised to reset where necessary in January, the discipline is the same: wait for new information, reward credible guidance, and avoid extrapolating thin‑volume year‑end moves into 2026 theses. Into today’s open, the bias is neutral‑to‑cautious with elevated dispersion.

Key Takeaways#

The indices eased into year‑end on thin volume. According to Monexa AI, the S&P 500 closed at 6,896.24 (-0.14%), the Dow at 48,367.06 (-0.20%), and the Nasdaq at 23,419.08 (-0.24%); volatility gauges rose with ^VIX +3.14% and ^RVX +0.63%.

Fed minutes were more cautious than hoped. As reported by Reuters, the dollar firmed after the minutes showed reluctance to endorse additional near‑term cuts, pressuring growth‑sensitive cohorts.

Sector signals are mixed and methodology matters. Monexa AI’s sector table shows Technology +0.05% and Energy -0.21% at the close, but breadth flagged mid/small‑cap tech weakness and energy leadership. Use close prints for benchmarking and breadth for flow diagnostics.

AI remains the micro driver. The Groq licensing arrangement, corroborated by Groq and Reuters, and WSJ/FT coverage of cloud and competitive dynamics, keep inference at center stage for NVDA and peers.

Be selective across sectors. Favor data‑center REITs (EQIX, DLR), utilities with balance‑sheet strength (NEE, EXC), upstream/services energy leaders (OXY, SLB), and software platforms with clear AI monetization paths (DDOG). In Financials, overweight insurers over alternatives near‑term; in Consumer, align with pricing power and innovation while avoiding home‑exposed laggards until visibility improves.