Here’s why December 10 could be a very important day for the stock market | Colorful fool

Wall Street is currently digesting a new wave of quarterly operating results from US tech giants such as Nvidiawhich provided valuable updates on the state of the artificial intelligence (AI) revolution. However, as the end of 2025 approaches, there is another event that analysts are eagerly awaiting.

On December 10, the US central bank will conclude its final two-day meeting of the year, where it is widely expected to cut the federal funds rate (overnight interest rate). The economy is at a critical juncture with sticky inflation and rising unemployment, so the central bank’s decisions — and subsequent comments from Chairman Jerome Powell — could affect the direction of the stock market in 2026.

Here’s what the rate decision could mean for the benchmark S&P 500 (^GSPC +0.69%) index.

The Fed’s two main goals are at odds

The Fed has a dual mandate:

1. Maintain price stability by maintaining inflation growth of around 2% per year as measured by the Consumer Price Index (CPI).
2. Maintain full employment by creating an economic environment that supports job growth, although the Fed does not have a specific target for the unemployment rate.

The latest CPI reading from September showed an annualized inflation rate of 3%, well above the Fed’s 2% target. Additionally, this was the highest reading in over a year, so this data point is headed in the wrong direction. A rate cut would not normally be tolerated with inflation at current levels, but the other side of the Fed’s dual mandate could require a policy adjustment.

The U.S. economy added 73,000 jobs in July, well below economists’ consensus forecast of 110,000. Additionally, in the same report, the Bureau of Labor Statistics (BLS) revised the May and June numbers down by a whopping 258,000 jobs, signaling a much larger weakening of the economy than initially expected.

The economy then added just 22,000 jobs in August, and the unemployment rate jumped to a four-year high of 4.3%. That’s partly why the Fed cut interest rates in September and then again in October.

The labor market saw a small rebound in the latest nonfarm payrolls report, which was initially delayed due to the government shutdown. It posted a strong net gain of 119,000 jobs in September, but that wasn’t enough to keep the unemployment rate from falling to 4.4%. Simply put, more people are entering the workforce, but businesses are not hiring enough workers to cover supply.

The probability of a December cut is high

CME group developed a tool called FedWatch that analyzes trading activity in the 30-day Fed funds futures market to determine the probability of interest rate movements. That currently means an 81% chance of a December cut, which is in line with the latest guidance from policymakers.

In September, the Fed released its latest quarterly Summary of Economic Projections (SEP), which outlines where members of the Federal Open Market Committee (FOMC) expect economic growth, the unemployment rate, inflation and interest rates to be over the next few years. The report pointed to two more rate cuts by the end of 2025, and since we already got one cut in October, the door is open for a second cut in December.

Falling interest rates are great for stocks — but there’s a catch

Lower interest rates can be bullish for the stock market for several reasons. First, they allow businesses to borrow more money to fuel their growth. Second, they reduce the cost of debt, which is a drag on corporate profits, and profits affect stock prices over the long term. Finally, falling interest rates reduce the return on risk-free assets such as cash, pushing investors into growth assets such as stocks and real estate.

But investors don’t want the Fed to cut interest rates on the grounds that the economy is headed for recession. With the unemployment rate currently at a four-year high, there is a risk that consumer spending could slow sharply from here, which would be bad news for corporate earnings. This result could actually send the S&P 500 flying lowereven when interest rates fall.

We’ve seen this several times over the past 25 years, when unexpected economic shocks sent the stock market into bear territory despite the Fed’s supportive monetary policy. The dot-com crash of the early 2000s comes to mind, as well as the global financial crisis of 2008 and the COVID-19 pandemic of 2020.

There is no sign of a major shock on the horizon at the moment, but when investors fear an economic slowdown is coming, they will reduce their exposure to risky assets in favor of safe, income-producing assets like Treasuries or even cash. That’s why Wall Street will be listening closely to Fed Chair Jerome Powell on December 10; if he sounds overly concerned about the state of the economy, it won’t be a surprise to see some money fleeing the stock market, especially with the S&P 500 trading at a historically expensive valuation.

However, the index has always recovered from even the most dire economic events, so any weakness from here is likely to be a buying opportunity for patient long-term investors.