December 2025 index market overview: momentum eases despite rebound

The close of 2025 has seen a rebound in major equity indexes, but the December report highlights concerns that upward momentum may be subsiding, especially in the US markets. A combination of enthusiasm for generative AI and dovish signals from the US Federal Reserve initially fueled a surge in optimism and dip-buying.

However, stretched valuations, rising 'Wall of Worry' headwinds, and divergence in underlying earnings growth suggest a more fragile outlook for the major indexes.  

US equities: rebound and rising fragility  

The S&P500 and Nasdaq indices saw gains in December, yet signs of underlying weakness and concentration risk are apparent.  

• Market performance (December 2025 snapshot):  
  - The S&P500 climbed 0.6% MoM (+13.2% YoY), reaching close to its all-time high, but failed to breach its October high.  
  - The Nasdaq outperformed slightly with a 1.0% MoM gain (+18.4% YoY).  
  - The Dow Jones showed the strongest monthly growth at 1.9% MoM (+8.9% YoY).  
• Key market concerns:  
  - Stretched valuation: US equities appear to have heavily discounted good news. The S&P500 12-month forward P/E ratio stands at 22.9, while Nasdaq 100 is at 28.4.
• Divergent earnings: IBES 12-month forward EPS expectations for the S&P500 have risen to a robust 14.3% YoY. This is the highest level since   
  October 2021 and well above the historical average (11.7% YoY) and the actual outcome (7.5% YoY), suggesting good news is heavily priced in.  
• Concentration risk: The rally has been heavily sustained by large capitalization IT firms, with the top ten companies in the S&P500 index   
  making up 41.38% of the weight—as much as the bottom 467 combined. This increases financial fragility and exposure to sector-specific shocks.  
• Investor sentiment: Short-term sentiment, captured by the AAII weekly survey, showed a sharp improvement in early December. However, this   
  bullishness is viewed as fragile, with a record 63% of fund managers surveyed by the Bank of America reporting that they believed US equities to be over-valued.  

FTSE100: paused rally, but upside remains  

The UK's FTSE100 index experienced a temporary falter, pulling back from a key psychological barrier.  

• Market performance: The FTSE100 was down 2.5% MoM , but remains up 16.3% YoY. The index failed to breach the 10,000 level, posting an all-time high of 9,930 on November 12th before weakening.  
• Sector highlights: Lagging the index were consumer-facing companies, while strength was observed in stocks like Games Workshop Group (+27.7% MoM). High Street banks also continued their strong run.  
• Earnings and valuation:  
  - Earnings expectations: IBES 12-month forward earnings expectations have lifted to 10.7%, their highest level since November 2021. This lift is   
  consistent with a modest recovery in UK export growth.  
  - Valuation: The estimated 12-month forward P/E ratio has weakened to 12.8x from its recent peak of 13.2x, bringing it slightly below its post
  millennium average (13.3x).  
• Outlook: Scenario analysis suggests significant upside potential. If earnings grow in line with expectations (+10.7% YoY) and the P/E ratio climbs to its post millennium average (13.3x), the index could reach 10,545 (+9.1%). The combination of rising earnings expectations and relaxed valuation supports the index, keeping 10,000 as a viable near-term target.

DAX40: rebound with valuation stretch  

The DAX40 index rebounded in December, but this comes amid a growing divergence between historical and forward-looking earnings.  

• Market performance: The DAX40 was up 1.8% MoM (+19.9% YoY).  
• Concentration risk: Similar to the US, large capitalization firms like SAP (-3.1% MoM) and Siemens Group (-3.6% MoM) underperformed, leading the overall index to lag behind the average company's performance (+3.3% MoM). The top five companies (SAP, Siemens, Airbus, Allianz, and Deutsche Telecom) now account for 40.9% of market capitalization.  
• Automotive rebound: A notable feature was the strength in the automotive sector stocks, with Porsche, Volkswagen, and BMW all posting double-digit monthly gains.  
• Divergent earnings and valuation:  
  - Earnings expectations: IBES 12-month forward earnings expectations are a robust 12.5%. However, historical EPS has stalled, exhibiting no clear trend and is only up 3.5% YoY, pointing to increasingly stretched valuation.  
  - Valuation: The current 12-month forward P/E ratio is 14.8x , which is well above its post-millennium average (12.3x).  
• Outlook: This stretched valuation is based on an earnings growth acceleration that is far from assured and increasingly divergent from actual earnings. For the index to continue climbing, a material lift in earnings or further valuation stretch would be required.  

Economic and monetary policy outlook  

Upcoming events and data releases suggest mixed signals for the start of 2026.  

• US: Core CPI inflation for November is expected to remain moderately above target at 3.0% YoY. However, an easing in the labor market and reduced tariff fears suggest that headline and core inflation may have peaked, looking set to slow over the course of 2026. The ISM manufacturing PMI slipped to 48.2 in November, indicating contraction.  
• UK: The Bank of England is widely expected to cut the Bank Rate by 25 basis points to 3.75%, citing weakening labor market conditions that ease pressure on core inflation.
• EU: The European Central Bank (ECB) is widely expected to keep the Discount Rate unchanged at 2.0% throughout 2026, due to a lift in the composite PMI and inflation expected to rise 2.2% YoY in November.  

Stay updated  

For real-time insights on gold price movements and market trends, download our Index Monthly Report.