Markets at Year-End: AI, Rate Cuts & Small-Cap Recovery

What was said and why it matters

On 9 December 2025, during the show Mornings with Maria, guests Thomas Martin (senior portfolio manager at Globalt Investments) and David Laut (founder & CIO at Kerux Financial) weighed in on key market themes: the growing impact of AI, expectations for the Fed’s next moves, and why small-cap stocks could be poised to outperform in the near term. Fox Business

They highlighted:

Bullish signals from AI and tech adoption, which continue to reshape investor appetite and sector leadership.
A widely held expectation of one or more rate cuts by the Fed before year-end a scenario believed likely by many in markets. Fox Business+1
The potential for small-cap stocks to outperform, given their sensitivity to interest rates and the possibility that rate cuts could reduce borrowing costs and boost earnings potential for smaller firms. Fox Business

Taken together, their view paints a cautiously optimistic picture: one where technology-driven growth, easier monetary policy, and selective value in smaller equities could drive returns as we close out 2025.

The Macro Backdrop: What’s Driving Fed Expectations

Looking more broadly, recent minutes from the Fed’s policymaking body the Federal Open Market Committee (FOMC) show that financial markets have already begun pricing in rate cuts. In the September 2025 meeting, many participants anticipated 25 basis-point reductions at the next meeting, with a material chance of further cuts by year-end. Federal Reserve

Why the shift? After a period of tighter labor-market data than expected, more recent employment and economic signals have flagged a potential softening nudging both the Fed and investors toward easing. Federal Reserve

That downward pressure on rates has ripple effects: lower borrowing costs, cheaper capital for businesses, and renewed investor appetite for rate-sensitive, high-growth or high-leverage sectors many of which include small-cap firms and tech.

Small-Cap Stocks: Why They Could Bounce Back

Smaller-capitalization companies (small caps) stand to benefit disproportionately from a rate-cut environment. They often carry higher debt levels, tighter margins, and greater need for accessible credit which becomes much cheaper when rates fall. Lower interest costs can help boost their profitability or at least reduce financial risk.

Moreover, after years of underperformance relative to large-cap giants (especially in tech), many small-cap stocks are trading at attractive valuations. With supportive macro conditions and a potential rotation away from overpriced mega-caps, the stage could be set for them to outperform particularly if investors re-evaluate risk and return in a new rate regime.

AI + Tech + Macro A New Investment Thesis for 2026

The commentary from Martin and Laut suggests a growing convergence of three major themes as we approach 2026:

AI and technology-led growth continuing to drive interest and capital flows.
Monetary easing via rate cuts reducing cost of capital, supporting borrowing, investment, and valuation.
Reassessment of smaller firms’ value potentially uncovering bargains in small caps that have been overlooked during the megacap-led rally.

If these forces align, investors might see a repricing not just of stocks, but of how risk and growth are valued across the market spectrum.

What to Watch (Risks & Variables)

The Fed’s next moves: If inflation or employment data surprises on the upside, the rate-cut narrative could stall.
Broader macro uncertainties global economic slowdowns, geopolitical risks, or renewed inflation pressures could derail investor optimism.
Execution risk for small-cap and technology companies: smaller firms tend to be more vulnerable to economic swings or tight credit conditions if rates stay elevated.
Valuation and volatility while small caps are potentially undervalued, they often come with higher volatility and risk compared to blue-chip names.

Final Thoughts

The end of 2025 could mark an inflection point: a shift from large-cap, mega-tech dominance toward a broader, more diversified rally where smaller companies and technology-driven firms capitalize on easier money and renewed investor attention. The conversation on Mornings with Maria underscores that many savvy investors are positioning themselves accordingly but as always, the path forward remains conditional on macroeconomic outcomes.

If you like, I can pull up historical data showing how small-cap stocks have behaved around past Fed rate-cut cycles (e.g. since 2000) that often helps contextualize how big a “bounce” might realistically be.