During Monday’s European session, Dow Jones futures rose by 0.14%, crossing the 48,500 mark. Meanwhile, S&P 500 and Nasdaq 100 futures climbed by 0.35% and 0.53%, reaching around 6,910 and 25,700, respectively. The trading activity is light this week due to the upcoming Christmas holiday. US index futures are enjoying the benefits of strong gains from last week, especially in technology stocks. On Friday, the Dow Jones increased by 0.38%, the S&P 500 rose by 0.88%, and the Nasdaq Composite gained 1.31%. This growth was fueled by positive sentiments around AI-related shares.

Market Caution And Fed Policy

There is still caution in the market because of the Federal Reserve’s careful policies. Cleveland Fed President Beth Hammack mentioned that the Fed is prepared to pause and assess the effects of the 75-basis-point rate cuts expected in the first quarter. The CME FedWatch tool indicates a 78.0% chance that the Fed will not change rates in January, up from 75.6% the previous week. The likelihood of a 25-basis-point cut has decreased to 22.0% from 24.4%. Traders are looking forward to US Q3 Gross Domestic Product data, corporate profits, and industrial production figures. Recent information suggests future Fed rate cuts may be possible. While index futures show positive momentum, largely driven by optimism about AI stocks, we expect light trading volumes this holiday-shortened week. This may exaggerate market movements, indicating that, although the trend is upward, we should be cautious with any positions.

Understanding Tech Sentiment

The Federal Reserve’s careful outlook creates caution in the market. Cleveland Fed President Beth Hammack’s recent remarks about pausing to evaluate the economy support this perspective. Currently, the market is estimating a 78% chance that the Fed will keep rates steady in January. This means the easy gains from anticipating rate cuts may be over for now. The positive sentiment in tech stocks makes sense, especially since major semiconductor companies reported earnings that exceeded expectations by over 15% in November 2025, thanks to strong demand driven by AI. However, we need to consider the recent Consumer Price Index data, which showed an inflation rate of 3.4% year-over-year, slightly higher than expected. This persistent inflation justifies the Fed’s cautious approach to further easing. Looking back, this year’s strong market performance has been driven by the 75 basis points in rate cuts from the Fed in the first quarter of 2025. Now, we find ourselves in a phase of evaluation as the central bank tries to understand whether those cuts have led to renewed price pressures. This suggests that volatility could increase with the release of new GDP and corporate profit data this week. With lower trading volumes and a hopeful atmosphere, short-dated call options on tech-heavy indices like the Nasdaq 100 could be a method to engage in a potential year-end rally. Conversely, since the CBOE Volatility Index (VIX) is currently near a yearly low of 13.5, buying protective puts is a cost-effective hedge against any unforeseen downturns. While these low volatility levels may present opportunities, they also indicate some market complacency. Create your live VT Markets account and start trading now.

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