On Monday, the Dow Jones struggled for positive momentum, pressured by AI stock performance. Despite challenges, markets remain in a strong position for the year. The final 2025 Fed check-in is expected this week, though other significant data releases are limited.
Us Stock Market Performance
The US stock market opened the last trading week of 2025 quietly, despite nearing record highs. A shortened trading week, due to an upcoming holiday closure, will have only one major data release: Tuesday’s Federal Reserve Meeting Minutes.
Main indexes face challenges due to low year-end volumes. The S&P 500 reached record highs overnight before stabilising, affected by a dip in AI stocks and home-building materials. The Dow Jones peaked overnight but settled with a modest 100-point rise from last Friday, dragged by a 1.7% drop in Nvidia shares.
The Dow Jones is on track to maintain or surpass its bullish trend for the eighth consecutive month into the new year. Despite decreased volumes, the Dow has risen over 14% year-to-date, with the S&P 500 nearing a 17.5% increase from January.
The Fed’s Meeting Minutes release on Tuesday is crucial for market watchers. Fed officials anticipate two quarter-point rate cuts over the next two years, amidst market speculation.
Market Volatility and Expectations
With markets stalling near record highs in thin holiday trading, we believe a significant move is imminent. The upcoming Federal Reserve minutes on Tuesday are the most likely catalyst for this shift. With the CBOE Volatility Index (VIX) hovering near a low of 14, options pricing is relatively cheap, offering an efficient way to position for a potential spike in volatility.
We should pay close attention to the softening in AI leaders like Nvidia, especially after their historic, multi-hundred-percent surge during the 2023-2024 period. This weakness could be a warning sign for the broader tech sector, which has driven much of this year’s rally. Buying put options on tech-heavy indexes like the QQQ or on individual high-flyers could serve as a valuable hedge against a tech-led correction.
The main event is the Fed minutes, where we will look for clues that deviate from their cautious dot plot. If the minutes hint at a more dovish stance, it could ignite the next leg of the rally, making short-dated call options on the SPY attractive. However, any reinforcement of a hawkish, patient tone could easily trigger a sell-off from these lofty levels.
Given that the Dow is up over 14% for the year, now is a prudent time for us to protect those gains heading into 2026. This is especially true after the aggressive rate-hiking cycle that peaked back in 2024, the effects of which may not be fully realized. Purchasing out-of-the-money put spreads on the major indices offers a cost-effective way to insure portfolios against a hawkish surprise or a continuation of weakness in key growth sectors.
