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Welcome back to Physician on FIRE’s weekly market updates!
In the weeks ahead, markets are brimming with opportunities as President-elect Trump’s emerging tariff threats fuel uncertainty in global supply chains. Industrials, fueled by expectations of protectionist policies and a manufacturing rebound, extended their rally. Meanwhile, UBS highlights AI as the investment of the century, offering a potential entry point during the sector’s temporary lull.
Market Overview
The markets continued their bullish momentum this week, with major indices hitting new highs. The Dow Jones rose 2.42% to close above the 45,000 level for the first time, while the S&P 500 rose 1.47% to close at another record high.
The Russell 2000 outperformed its peers, rising 2.99% and approaching previous highs set more than three years ago. The tech-heavy Nasdaq 100 lagged with a modest gain of 0.89%, still very close to all-time highs.
Robust consumer spending boosted market confidence, with U.S. online Thanksgiving sales up 8.8% year-over-year and Black Friday sales forecast to rise 9.9%, making consumer discretionary stocks the week’s top performers. Positive economic data – a 0.6% rise in personal income, double expectations, and a 2.0% rise in pending home sales – fueled the rally.
Political developments added a layer of complexity: investors welcomed President-elect Donald Trump’s nomination of Scott Bessent as Treasury Secretary, but his unexpected announcement of tariffs on imports from Mexico, Canada, and China created uncertainty and hurt auto stocks.
Last Week’s Highlights
- U.S. Core PCE Inflation at 2.8% YoY: Core Personal Consumption Expenditures hit a six-month high in October.
- Thanksgiving Online Sales Up 8.8%: U.S. online sales surged on Thanksgiving Day; Black Friday sales were forecasted to grow 9.9%.
- Trump Announces Tariffs: President-elect Trump proposes 25% tariffs on Mexico and Canada imports and an additional 10% on China.
- Scott Bessent Named Treasury Secretary: Investors welcomed Trump’s nomination of hedge fund veteran Scott Bessent, expecting more measured policies and tariffs.
- Treasury Yields Decline: The yield on the 10-year U.S. Treasury fell by 22 basis points, driven by Scott Bessent’s nomination.
- U.S. Consumer Spending Strengthens: Personal income rose 0.6% in October—double expectations—while spending increased 0.4%.
- Manufacturing Weakness Persists: Durable goods orders rose only 0.2% in October, missing expectations.
- Automaker Stocks Slide on Tariff Threat: GM fell 5.0% as new tariffs on Mexico and Canada raised cross-border trade concerns.
- Eurozone Inflation Rises to 2.3%: Annual inflation increased for a second month, but underlying pressures eased.
- China Injects RMB 900 Billion Liquidity: The PBOC acted to support the economy in light of potential U.S. tariffs and tightening liquidity.
- Israel-Hezbollah Cease-Fire Eases Tensions: A cease-fire agreement reduced fears of expanded Middle East conflict.
- Oil Prices Fall 4.5% to $68: Reduced Middle East tensions led to lower oil prices and a decline in energy stocks.
- Gold Prices Decline: Gold fell 2.4% to $2,650 over the week, due to easing geopolitical tensions and rising U.S. consumer confidence.
Week Ahead & Implications
ISM Manufacturing PMI: Signs of a Manufacturing Revival
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The U.S. ISM Manufacturing PMI, set for release on December 3, is expected to show an improvement, with forecasts predicting a rise to 47.5 from October’s 46.5. Although still indicating contraction (below 50), a higher reading suggests that the manufacturing slump may be bottoming out.
An uptick in manufacturing activity would signal strengthening economic fundamentals, potentially keeping investor confidence elevated. It may also alleviate concerns about the manufacturing sector’s drag on overall GDP growth. Given that manufacturing weakness has been one of the few headwinds for equities, particularly industrials and materials, an improvement could lead to further rotation into these sectors.
Trade Wars and Tech Relief
President-elect Donald Trump’s announcement of 25% tariffs on imports from Mexico and Canada and an additional 10% on Chinese imports signals a significant escalation in trade tensions. This aggressive move threatens to disrupt global supply chains, particularly in automotive, agriculture, and manufacturing sectors.
Industries that rely heavily on cross-border trade – such as automakers Ford and General Motors – could face continued pressure as Mexico and Canada hint at possible retaliation. However, domestically focused companies or those that benefit from protectionist policies may find new opportunities in this evolving trade environment.
As tensions rise, a potential easing of U.S. restrictions on semiconductor equipment sales to China offers a contrasting narrative. Reports suggest that the U.S. may take a softer stance than initially anticipated, which has already boosted shares of key players such as Applied Materials, Lam Research, and KLA. A less stringent approach could mitigate supply chain disruptions and support the global technology sector, particularly multinational semiconductor companies.
AI Emerges as the Investment of the Century
UBS’s 2025 outlook highlights artificial intelligence (AI) as a transformative investment opportunity that could become one of the most influential innovations of the century.
The AI value chain is expected to generate revenues of more than $1.1 trillion by 2027, spanning enabling technologies, intelligence layers, and application sectors, with infrastructure ($331 billion), cloud ($185 billion), LLMs ($255 billion), and applications ($395 billion) driving the growth.
The accelerated adoption of AI across industries is expected to drive substantial growth, innovation, and profitability. Big tech companies are increasing capital expenditures to scale AI infrastructure, signaling robust demand for AI-enabling hardware and software.
UBS suggests having 25% equity exposure in companies central to the AI ecosystem, including semiconductor manufacturers, cloud service providers, and firms specializing in AI applications. Given the potential energy demands of AI, opportunities also exist in energy-efficient technologies supporting AI infrastructure.
Commercial Real Estate Distress Signals Potential Market Weakness
The commercial real estate (CRE) market is showing signs of significant stress, with distress rates for CRE collateralized loan obligations (CLOs) reaching an all-time high of 13.1%. Of particular concern is the multifamily sector, where delinquencies have reached 16.4%, meaning that one in six multifamily bridge loans is in distress.
As illustrated in the chart below, apartments exhibit the highest levels of potential distress (orange), with significant vulnerabilities also seen in all other sectors.
This level of distress in the CRE market could have broader implications for financial institutions and the overall economy. Banks with high exposure to CRE loans may face increased default risks, which could affect credit availability. Be cautious of financial institutions with high exposure to commercial real estate. Positions in commercial real estate investment trusts (REITs) should also be reassessed.
U.S. Non-Farm Payrolls: A Turning Point for Rate Expectations
The upcoming U.S. Non-Farm Payrolls (NFP) report on December 7th will be a key market mover. After a hurricane-impacted October that added only 12,000 jobs, economists are forecasting a robust 190,000 gain in November, with the unemployment rate expected to rise slightly from 4.1% to 4.2%.
This rebound in payrolls will recalibrate expectations for Federal Reserve policy. A strong report is likely to reduce the 50/50 chance of a 25 basis point rate cut at the December 18 FOMC meeting, causing Treasury yields to reverse their recent decline and putting further pressure on rate-sensitive sectors such as real estate. It would continue to support cyclical sectors such as financials and industrials that benefit from improving economic momentum.
China’s Caixin PMIs: Gauging the Health of the Global Supply Chain
China’s Caixin Manufacturing and Services PMIs, releasing on December 2 and 4 respectively, will offer crucial insights into the world’s second-largest economy. Expectations are for the Manufacturing PMI to inch up to 50.5 from 50.3, signaling modest expansion.
These readings are significant as they reflect China’s domestic demand and its role in global supply chains. Continued improvement may indicate that China’s late-September stimulus measures are taking effect. A stronger Chinese economy could boost global markets by improving the outlook for commodities and reducing fears of a global slowdown.
Most Impactful Events to Watch Next Week
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