Five for Friday – December 12, 2025

Fed, International, Rallies, Bullishness, and On This Day

1. Rates

As expected, the Federal Reserve cut interest rates this week, bringing their target range down to 3.50-3.75%, nearly 2 percentage points lower than it was as recently as mid-2024. Also, this week, the odds-on favorite to be the next Fed chair, Kevin Hassett, said there was “plenty of room” to cut rates further in the months ahead. All else equal, lower interest rates are good for stocks – and one of a handful of items set to stimulate the consumer in 2026. But if the Fed continues to lower interest rates (and buy bonds) well into 2026, the U.S. will find itself somewhat at odds with the global backdrop, where international yields are rising as investors price-in the potential for rate hikes in key areas like Canada, Japan, and the eurozone. In theory, this could add pressure to the already weaker U.S. dollar (higher rates attract foreign investment, increasing demand for a country's currency and causing its value to rise). That’s not a bad thing, either. While a weaker dollar often stirs longer-term concerns about reserve currency status, in recent decades it has actually portended stronger stock market returns – both at home and abroad.  

2. Going global

Case in point: 2025. Over the year ending with Nov. 2025, the MSCI All Country World Ex-USA Index bested the S&P 500 by ~12 percentage points. That is the biggest outperformance of international over U.S. stocks in at least 15 years. And while not all of that outperformance can be attributed to currency fluctuation, the dollar’s recent weakness (-9% year-to-date) is undoubtedly a big factor. International stocks are under-owned by U.S. investors, feature a noticeably different sector profile (more financials and industrials, far less tech), and, while recent laggards, have outperformed U.S. stocks for longer cycles in recent history (late ‘80s, mid ‘00s). In a time of worries about AI exposure, index concentration and bubble potential, making international a part of diversification seems like prudent risk management.

3. Momentum

Robust global returns, however, do not have to come at the expense of U.S. strength (which we expect to continue into 2026). If anything, things are going well enough that one of the primary investor anxieties is the recent strength itself: the fear that years of strong returns are setting us up for a disappointing 2026. I’d push back.  First, this bull market has not exactly been an uninterrupted dream scenario. This year might close out with double digit returns, but it doesn’t erase the near-bear market, mid-April crash. Today’s gains have not been unearned. And second, strong returns already secured don’t necessarily mean weak returns ahead. The S&P 500 was up in 2023, 2024, and (looking like) 2025, but making it four in a row wouldn’t be out of line with history. Since 1928, there have been 36 calendar years that followed a three-year stretch of up-years. As our table shows, the median return in the fourth is 15%.  

4. Bulls

But if there’s a risk worth monitoring, it’s probably sentiment. Bull markets don’t typically become bubbles until standard optimism morphs into euphoria. Sentiment has been fairly restrained for most of this rally, but there are signs that bears are starting to throw in the towel: A.I.I. bullishness is near 2025 highs, strategists are setting ever-higher bars, and the IPO market is heating up (a late ‘90s staple). Something to watch.

5. On this day

in 1914, the New York Stock Exchange reopened after its longest closure ever – a 4.5 month stretch following the start of WWI. The gears of capitalism kept churning, however, with trading simply moving out the backdoor onto New Street (a small roadway behind the NYSE) in an unregulated, curbside “outlaw market.” While occasionally derided for uncouthness, the proprietors’ entrepreneurialism provided critical liquidity and price discovery during a time of strain.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision.  This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2025 Robert W. Baird & Co. Incorporated.

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