INVESCO: The New Phase of Equity Markets
1 DEC, 2025
By Invesco
By Luca Simoncelli, Investment Strategist at Invesco
The past week appears to mark the transition to a new phase in the forces shaping equity markets. The rotation underway in the U.S. market is visible in the underperformance of the momentum factor, combined, however, with a renewed strength in the Nasdaq index. The positions that have dominated market trends for many quarters are now giving way to a broader and more diversified range of opportunities. These opportunities remain tied to technology and AI, but are no longer so concentrated in hyperscalers and the Magnificent 7. The solid performance of smaller-capitalization companies is further confirmation of this shift.
This rotation reflects, for example, a shift in focus from computing power to electricity availability, or toward AI applications in the pharmaceutical and healthcare sectors. The next phase of AI is no longer solely about building data centers; indeed, the launch of Google Gemini 3 has highlighted a transition of the Large Language Model industry to a new phase of development and research.
Macroeconomic conditions supporting equity markets—increasingly also outside the United States—remain positive. Market expectations for a Fed rate cut have risen significantly, supported by interviews from several Fed members backing a still-expansionary stance. Analysts’ revisions to earnings-growth expectations have moved upward, pointing to EPS growth next year of 13% for the S&P 500 and 10% for the Stoxx600.
This week, the market will focus on PMI economic activity data across major regions. In the U.S., labor-market indicators will be particularly important, including the number of new payrolls reported by ADP. The theme of a K-shaped U.S. economic growth pattern remains central. American consumer confidence is still under pressure, yet the wealth effect clearly supports higher-income households.
Prospects of a change in leadership at the Federal Reserve have contributed to a decline across the Treasury yield curve. Kevin Hassett, current director of the National Economic Council, has emerged as the leading candidate for the next Fed Chair, with an official decision expected soon. His appointment would signal a shift toward a more accommodative monetary policy, potentially allowing further rate cuts even with an economy already overheated and inflation above the 2% target.
In Europe, sentiment indicators compiled by the European Commission showed slight improvement, confirming stable growth trends. Meanwhile, the ECB’s Financial Stability Report raised some concerns regarding market volatility and elevated valuations. This week may prove decisive in the Ukraine peace process, and it is reasonable to expect improved market conditions overall, especially for sectors that may be involved in rebuilding Ukraine’s economy.
After weeks of anticipation—including a leak just hours before the Chancellor’s address to Parliament—the UK budget aligned with expectations: no increases to major taxes, consolidation via frozen tax brackets, fiscal changes to pensions and real estate, and several minor measures to create roughly £22 billion of fiscal headroom, partially offset by £12 billion in social support. Much of the consolidation is pushed to the final years of the term, increasing uncertainty, yet market reaction was generally positive, with gilt yields stable and expectations firming around 2–3 rate cuts next year by the Bank of England.
In Asia, a minor diplomatic incident between Japan and China emerged from comments by Prime Minister Takaichi regarding the importance of defending Taiwan’s independence for regional stability. The remarks seem more like an unintended response to journalists than a strategic confrontation. Meanwhile, in China, the manufacturing PMI showed slight improvement, reducing short-term risks of an economic slowdown.
