Here's Why Dec. 10 Could Be a Very Important Day for the Stock Market

Wall Street is currently digesting a fresh wave of quarterly operating results from American tech giants like Nvidia, which provided a valuable update on the state of the artificial intelligence (AI) revolution. However, as we approach the end of 2025, there is another event analysts are eagerly anticipating.

On Dec. 10, the U.S. Federal Reserve will conclude its final two-day meeting of the year, where it's widely expected to cut the federal funds rate (overnight interest rate). The economy is at a critical juncture, with sticky inflation and a rising unemployment rate, so the central bank's decision -- and subsequent commentary from chairman Jerome Powell -- could influence the direction of the stock market as we head into 2026.

Here's what the rate decision could mean for the benchmark S&P 500 (SNPINDEX: ^GSPC) index.

Image source: Getty Images.

The Fed's two main goals are in conflict

The Fed has a dual mandate:

1. Maintain price stability by keeping the rate of inflation increasing by around 2% per year, as measured by the Consumer Price Index (CPI).
2. Maintain full employment by creating an economic environment that supports job growth, although the Fed doesn't have a specific target for the unemployment rate.

The latest CPI reading from September showed an annualized inflation rate of 3%, well above the Fed's target of 2%. Plus, it was the highest reading in more than a year, so this data point is trending in the wrong direction. Interest rate cuts would normally be off the table with inflation at the current level, but the other side of the Fed's dual mandate might call for a policy adjustment.

The U.S. economy added 73,000 jobs in July, far below economists' consensus forecast of 110,000. Plus, in that same report, the Bureau of Labor Statistics (BLS) revised the May and June numbers down by a whopping 258,000 jobs, signaling far more weakness in the economy than originally thought.

The economy then added just 22,000 jobs in August, and the unemployment rate jumped to a four-year high of 4.3%. This is partly why the Fed cut interest rates in September, and then again in October.

The jobs market staged a small recovery in the latest non-farm payrolls report, which was initially delayed due to the government shutdown. It showed a strong net addition of 119,000 jobs in September, but that wasn't enough to stop the unemployment rate from ticking higher to 4.4%. Simply put, more people are entering the workforce, but businesses aren't hiring enough workers to meet supply.

The odds of a December cut are high

CME Group developed a tool called FedWatch, which analyzes trading activity in the 30-Day Fed Funds futures market to determine the probability of interest rate moves. It currently implies an 81% chance of a December cut, which is in line with the most recent guidance from policymakers.

In September, the Fed released its latest quarterly Summary of Economic Projections (SEP) report, which outlines where members of the Federal Open Market Committee (FOMC) expect economic growth, the unemployment rate, inflation, and interest rates to be over the next few years. The report pointed to two more rate cuts before the end of 2025, and since we already got one cut in October, the door is open for a second cut in December.

Falling interest rates are great for stocks -- but there's a catch

Lower interest rates can be bullish for the stock market for a few reasons. First, they allow businesses to borrow more money to fuel their growth. Second, they reduce the cost of debt, which is a tailwind for corporate earnings, and earnings drive stock prices over the long term. Finally, falling interest rates reduce the yield on risk-free assets like cash, which pushes investors into growth assets like stocks and real estate.

However, investors don't want to see the Fed slash interest rates for the reason that the economy is hurtling toward a recession. With the unemployment rate currently at a four-year high, there is a risk consumer spending could slow sharply from here, which would be bad news for corporate earnings. This outcome could actually send the S&P 500 lower, even with interest rates falling.

We've seen this a few times during the last 25 years, when unexpected economic shocks sent the stock market into bear territory despite supportive monetary policy from the Fed. The dot-com crash in the early 2000s comes to mind, as does the global financial crisis in 2008 and the COVID-19 pandemic in 2020.

There is no sign of a major shock on the horizon right now, but when investors fear an economic slowdown is coming, they trim their exposure to risk assets in favor of safe, income-producing assets like government bonds or even cash. That's why Wall Street will be listening carefully to Fed chairman Jerome Powell on Dec. 10; if he sounds overly concerned about the state of the economy, it won't be a surprise to see some money flow out of the stock market, especially with the S&P 500 trading at a historically expensive valuation.

However, the index has always recovered from even the most dire economic events, so any weakness from here is likely to be a buying opportunity for patient, long-term investors.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.