Market Commentary | December 2025
- Daniel Wildermuth
- Dec 2
- 3 min read
AI Delivers, Investors Reassess
November revealed investor nerves, as the S&P 500 and Nasdaq both slipped and the Dow eked out a tiny gain for the month from a good last day. The big tech and AI names that have carried most of the year did the heavy lifting again, but this time with more mood swings. Several leaders dipped early in the month not because anything was wrong, but because investors suddenly seemed to realize that expectations were possibly unrealistic.
Meanwhile, companies actually delivering AI results put up good numbers. Nvidia once again stole the spotlight. Its latest earnings not only beat expectations but also appeared to reassure investors that the AI build-out isn’t slowing down. Despite their better-than-expected earnings report, their stock price actually declined substantially on the day of the news. The company reported strong, broad-based demand from cloud providers, enterprises, and an expanding set of AI workloads. Just to give some sense of scale, AI is projected to account for around 12% of U.S. electricity use by 2028, up from under 0.1% in 2020. That’s more like a rocket launch than a normal growth trend.
Alphabet followed with its own rally after positive early reviews of its next-generation AI models. The broader chip and AI-infrastructure space bounced back as well once fears of an industry-wide slowdown faded. In short, fundamentals of the sector were solid.
But valuations were the real story behind the volatility. The Shiller P/E of the whole market crossed 40, something that has only happened once before. Even when using the more forgiving post-1990 baseline of around 27, today’s level is still clearly elevated. High valuations don’t cause a downturn by themselves, but they do mean future returns must be driven by earnings growth, rather than multiple expansion. AI-driven productivity gains might deliver, but the bar is much higher when you’re starting from valuations this elevated.
Credit markets provided their own warnings as well. On the surface, things looked fine—banks posted solid results, credit spreads stayed tight, and deal activity remained robust. Beneath the surface, however, lenders tightened terms on private-credit deals, especially after two recent bankruptcies (TriColor Holdings and First Brands Group) exposed poor collateral. It wasn’t a panic, but it signaled a significant shift. Institutional lenders are demanding more protection heading into 2026, and tighter covenants show lenders are getting defensive.
Still, the macro backdrop stayed surprisingly steady. Inflation continued easing, and the feared tariff-driven price spike never has materialized. Despite the headlines, many firms have been paying effective tariff rates closer to 12.5%, not the upper-teens numbers often cited. Tariffs still hurt growth, but the real impact has been milder than expected, which helped stabilize both sentiment and forecasts through the end of the year.
As 2025 wraps up, the market is balancing three forces—massive AI investment, high valuations, and an economy that refuses to either overheat or roll over. That combination makes the path forward both promising and fragile. The AI wave is real, but so are the expectations attached to it. Future gains will come down to investors believing in the AI story while also accepting the risks tied to today’s stretched valuations.
Daniel Wildermuth
Portfolio Manager, Quartz Astra Strategies
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