Equities Edge Higher as Holiday Spending Shows Resilience

U.S. equities traded modestly higher last week, with the S&P 500, an index of large U.S. companies, up 0.31 per cent and now sitting just shy of its all-time high. According to Mastercard SpendingPulse, U.S. retail sales (excluding autos) rose 4.1 per cent on Black Friday, with e-commerce sales up 10.4 per cent year over year. Mastercard’s Chief Economist highlighted that shoppers were increasingly focused on value, leaning heavily on promotions. Recent earnings from discount retailers echoed these themes, indicating that while consumers continue to spend, they are doing so with a greater emphasis on affordability. Dollar General and Dollar Tree both reported strong traffic and continued to benefit from “trading down” across income cohorts as shoppers sought value-oriented alternatives. Collectively, the data reflects a bifurcated consumer landscape, with increased value-seeking behavior among lower-income cohorts even as broader spending remains steady heading into the end of the year.

Attention now turns to next week’s Federal Reserve meeting, where markets currently assign an 87 per cent probability of a 25bps rate cut. Policymakers face a complex economic backdrop as the labor market continues to show signs of gradual cooling, but inflation remains above target. Challenger, Gray & Christmas reported that year-to-date layoffs have reached their highest level since 2020, and ADP data showed a 32,000 decline in private payrolls in November, the fourth negative print in six months and the weakest since early 2023. However, initial jobless claims remain historically low and fell this week to their lowest level since 2022. The delayed September PCE report showed core prices rising 2.8 per cent year over year, in line with expectations but still above the Fed’s two per cent target, reinforcing the notion that inflation is easing only gradually. The recent data appears to support the market’s view that a softer labor backdrop gives the Fed sufficient justification to cut rates next week, even as inflation remains elevated.

Capital markets activity has shown signs of reaccelerating over the past few months, highlighted by Netflix’s agreement to acquire Warner Bros. Entertainment in a transaction valued at approximately $83 billion. The deal underscores a rising willingness among corporate acquirers to pursue strategic transactions after a subdued period for M&A. Looking ahead, investors will be watching several AI-related catalysts this week, including earnings from Broadcom and Oracle and a new model release from OpenAI, which may provide additional perspective on the durability of AI-driven capital spending, a key theme for markets throughout 2025.