On Monday, the Dow Jones had a tough time gaining positive momentum, mainly due to disappointing AI stock performance. Still, the markets are in a good position this year. This week, we expect the final Federal Reserve update for 2025, but major data releases will be limited.

US Stock Market Performance

The US stock market began the last trading week of 2025 quietly, even as it approaches record highs. With a holiday closing ahead, this week’s trading will be shorter, featuring only one major data point: Tuesday’s Federal Reserve Meeting Minutes. The main indexes are facing challenges from low trading volumes as the year ends. The S&P 500 hit record highs overnight but then stabilized, impacted by a drop in AI stocks and home-building materials. The Dow Jones also peaked overnight but closed with a modest rise of 100 points from last Friday, mainly affected by a 1.7% drop in Nvidia shares. The Dow Jones is on track to keep or exceed its positive trend for the eighth consecutive month as we move into the new year. Even with lower trading volumes, the Dow has increased over 14% year-to-date, while the S&P 500 is close to a 17.5% rise since January. The release of the Fed’s Meeting Minutes on Tuesday is important for market observers. Fed officials expect two quarter-point rate cuts over the next two years, amid ongoing market speculation.

Market Volatility and Expectations

As markets hover near record highs during thin holiday trading, we believe a significant movement is on the horizon. The upcoming Federal Reserve minutes on Tuesday could be the key catalyst for this change. With the CBOE Volatility Index (VIX) around a low 14, options pricing is relatively inexpensive, providing an efficient way to prepare for a potential rise in volatility. We should closely watch the recent downturn in AI leaders like Nvidia, especially after their massive gains of hundreds of percent during 2023-2024. This decline could be a warning signal for the broader tech sector, which has been a major player in this year’s market rally. Buying put options on tech-heavy indexes like the QQQ or on individual high-performing stocks could act as a useful hedge against a tech-driven correction. The main focus will be the Fed Meeting Minutes, where we seek clues that differ from their cautious dot plot. If the minutes suggest a more lenient outlook, it might spark a new rally, making short-term call options on the SPY appealing. However, if the tone stays hawkish and patient, it could lead to a sell-off from these high levels. Given that the Dow is up over 14% this year, now is a smart time to protect those gains as we head into 2026. This is particularly important following the aggressive rate hikes that peaked in 2024, as their impacts may not yet be fully felt. Buying out-of-the-money put spreads on major indices is a cost-effective way to safeguard portfolios against an unexpected hawkish surprise or ongoing weakness in critical growth sectors. Create your live VT Markets account and start trading now.

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