Is the Stock Market Rally Back On?

The stock market's recent resurgence has sparked a critical question: Is the rally sustainable, or is it a fleeting surge driven by speculative fervor and fragile macroeconomic optimism? As of November 26, 2025, the S&P 500 has reached a two-week high, buoyed by growing expectations of a Federal Reserve rate cut in December and a surge in artificial intelligence (AI)-related equities. Yet beneath this optimism lie structural risks that could undermine the momentum, including overvalued tech stocks, a fragile labor market, and deepening divisions within the Federal Open Market Committee (FOMC).

Structural Drivers of the Rally

The immediate catalyst for the rally is the market's pricing of a 25-basis-point rate cut at the Fed's December 9–10 meeting, with the CME Group's FedWatch tool indicating an 84.9% probability of such a move. This expectation has been reinforced by statements from key Fed officials, including San Francisco Fed President Mary Daly and Governor Christopher Waller, who have highlighted vulnerabilities in the labor market as justification for easing policy. Meanwhile, the AI sector has emerged as a second pillar of optimism. Alphabet's release of its upgraded Gemini 3 model has reignited investor enthusiasm, with AI-related stocks driving much of the S&P 500's gains. UBS notes that this momentum reflects broader confidence in the sector's long-term transformative potential.

However, these drivers are not without caveats. The AI boom, while impressive, is increasingly concentrated in a narrow set of stocks, raising concerns about overvaluation. As one analyst puts it, "The market is pricing in a future where AI delivers exponential returns", "but the present reality is still one of unproven commercial viability."

Risks to the Rally

The most immediate risk lies in the Fed's evolving stance. While the market has priced in a December cut, the Fed's October meeting minutes reveal a stark internal divide. Many policymakers either opposed the rate reduction or advocated for a pause, citing inflationary risks and the need for more data. Fed Chair Jerome Powell has echoed this caution, stating that a December cut is "not a foregone conclusion." This uncertainty is compounded by mixed economic signals: the Chicago PMI hit a 17-month low, while initial unemployment claims rose, suggesting a labor market that is softening but not yet in crisis. The Nasdaq article highlights these mixed signals.

A second risk is the fragility of the AI-driven rally. Despite the sector's recent outperformance, the S&P 500 remains down approximately 2% for December, with profit-taking in AI stocks contributing to volatility. Goldman Sachs Research acknowledges that while a December cut is likely, the broader market's ability to sustain gains depends on whether the AI boom can translate into durable earnings growth.

The Fed's Dilemma: Inflation vs. Growth

The Fed's December decision will hinge on its ability to balance two competing priorities: taming inflation and supporting a labor market that shows early signs of strain. Allianz's country risk report underscores this tension, forecasting a "cautious cutting cycle" in 2025 as inflation cools and growth remains subdued. JPMorgan Research, meanwhile, frames potential rate cuts as a form of risk management, anticipating two more reductions in 2025 and one in 2026 to cushion against a potential economic slowdown. Yet, as Reuters highlights, some FOMC members remain wary of premature easing, fearing it could rekindle inflationary pressures.

Conclusion: A Rally Built on Shifting Sands

The current stock market rally is a product of both genuine optimism and speculative positioning. While the AI sector's dynamism and the Fed's potential pivot offer a tailwind, the structural risks-overvaluation, economic fragility, and policy uncertainty-cannot be ignored. For now, the market appears to be pricing in a soft landing, but history reminds us that such narratives are often fragile. Investors would be wise to remain vigilant, recognizing that the Fed's December decision could either cement the rally or expose its vulnerabilities.