TSP Report December 2025
Facts:
- The government shutdown ended on November 12th and previously delayed economic and labor market data has trickled in since.
- The unemployment rate in September ticked up by 0.1% to 4.4%.
- The G Fund interest rate fell from 4.25% to 4.125% in November.
- The US Purchasing Managers Index (PMI) increased to 54.8 in November. Overall output has now grown in the US for 34 consecutive months.
- The S&P 500 (C Fund) gained just 0.13% in November and is up 17.33% year-to-date. Despite flat index performance, many individual sectors posted gains during the month.
- The next Federal Reserve meeting is January 28th. The likelihood of another rate cut at this meeting is currently low.
Analysis
Stocks retraced in November, marking one of the rare pauses thus far to the rally starting from the April 2025 market lows. Such a pullback was likely overdue as stocks have climbed almost uninterrupted, with the S&P 500 gaining over 30% since the depths of the April “tariff tantrum” lows. Given the positive economic and market backdrop, we view recent selling as likely a simple short-term pullback within an ongoing bull market.
Are we in a Bubble?
Much of November’s selloff was concentrated among this year’s high-flying technology companies that are most levered to the AI boom. Investors took profits, wondering whether AI stocks had simply gone too far and too fast. Even Google search volume indicated the largest spike in searches for the term “AI Bubble” since the start of their data collection in 2004, suggesting high anxiety that AI stocks could soon “pop,” delivering economic disappointment and portfolio losses.
Many “bubblers” suggest that we’re witnessing a sequel to the late 1990s/early 2000s “dot-com” boom and bust, pointing to current market valuation metrics, such as the “Shiller Price/Earnings Ratio” approaching levels not seen since then. And yes, it’s true that stocks are valued more richly versus many times in the past. The problem, however, is that valuations are only useful for long-term (preferably over 10 years) forecasting, and even then their utility then can be suspect as economic cycles, regime changes, and geopolitical events can sway markets more than any single valuation statistic. A particularly memorable example of how valuation is not useful for short-term timing is when Fed Chairman Allan Greenspan made his famous “irrational exuberance” speech in December of 1996, in which he expressed concern over stock market valuations. What happened after? The S&P 500 climbed for four more years, almost tripling over that time (if reinvesting dividends) before stocks finally rolled over into the early 2000s bear market.
Fast forward to today, and here’s what we know. The largest technology companies are making boatloads of money, with the average forward profit margin of the “Magnificent 7” technology stocks (Apple, Alphabet, NVIDIA, Tesla, Amazon, Microsoft, and Meta) rocketing from 18% to 27% over the last two years. Meanwhile, forward margins for the rest of the S&P 500 have been largely unchanged since 2018 and currently sit around 12%. With this in mind, are current technology valuations then justified? Perhaps or perhaps not, but we do know that when companies earn more it tends to lead to positive stock performance, and that should inspire confidence in investing, especially in established, “blue chip” companies such as those within the S&P 500 (C Fund). Now, there is a cohort of much smaller, non-profitable stocks that are trying to jump on the AI train with unproven businesses. These companies should be viewed as primarily speculative and only merit minimal weightings in portfolios, if any.
Bottom Line:
The bottom line is that the large, “Magnificent 7” stocks continue to post strong earnings growth and profitability which is helping to push the S&P 500 to new highs. The economy overall also remains robust, with the September jobs report coming in stronger than expected and the November S&P PMI report indicating accelerating economic growth and new business formation. Another 0.25% rate cut by the Federal Reserve on December 10th adds to the accumulated tailwinds that should help bolster stocks and economic growth. Summed up, there may be short-term blips in the market. However, we have confidence in the ability of US companies to generate profits, and overall have trust, and even optimism, in market growth.
We wish you and your families a happy and healthy holiday season, and look forward to serving you in 2026 and beyond.
