U.S. and European equities edged higher as easing inflation trends reinforced expectations for lower interest rates in 2026, supporting risk appetite despite stretched valuations.
U.S. stocks closed modestly higher, extending a late-year rally that has been fueled by confidence the Federal Reserve is nearing the end of its tightening cycle. The S&P 500 continued to hover near record levels, supported by strength in large-cap technology and communication services. Apple (AAPL) rose as investors rotated back into mega-cap growth names seen as long-term beneficiaries of easing financial conditions, while more cyclical sectors lagged.
Bond markets echoed the shift in expectations. Treasury yields drifted lower across the curve, with the 10-year yield easing as investors priced in the possibility of multiple rate cuts next year. Lower yields have helped underpin equity valuations, though strategists remain divided over how much further multiples can expand after a strong year for stocks.
European markets followed Wall Street’s lead, with the Stoxx Europe 600 posting modest gains. Rate-sensitive sectors such as real estate and utilities outperformed as traders assessed signals from the European Central Bank suggesting policy is likely to become more accommodative if disinflation continues. Financial stocks were mixed, reflecting concerns that lower rates could compress net interest margins even as loan demand improves.
Currency markets were relatively calm, with the U.S. dollar slightly weaker against major peers, offering support to multinational earnings expectations and emerging-market assets. A softer dollar also helped lift commodity-linked equities, particularly in materials and energy, though oil prices remained range-bound amid ample supply and uneven demand signals.
Volatility stayed subdued, a sign that investors remain comfortable adding exposure into year-end. Still, some portfolio managers cautioned that markets may be vulnerable to pullbacks in early 2026 if economic data weakens or if central banks push back against aggressive rate-cut assumptions. Elevated equity positioning and thin holiday liquidity have amplified price moves in recent sessions.
For now, markets appear content to focus on the prospect of easier monetary policy and resilient corporate earnings. The SPDR S&P 500 ETF Trust (SPY) continues to serve as a barometer of that optimism, reflecting a broad belief that slowing inflation can extend the expansion rather than derail it.
