U.S. Economy Surges 4.3%, S&P 500 Hits Record High, But Fed Rate Cut Hopes Cool

The U.S. economy is roaring, but investors are growing nervous. The Commerce Department reported that the economy expanded at a 4.3% annual rate in the third quarter of 2025, beating expectations and pushing the S&P 500 to a fresh record. This strength, fueled by resilient consumer spending, is creating a paradox: the better the economy does, the less likely the Federal Reserve is to cut interest rates in early 2026.

The Double-Edged Sword of Consumer Spending

Consumers were the driving force behind the impressive growth, with spending expanding 3.5% in the third quarter, up from 2.5% in the prior quarter. The momentum appears to have continued into the holidays. A preliminary report from Visa shows retail spending rose 4.2% this season. However, this spending spree is being financed partly by debt. According to LendingTree, 37% of Americans took on holiday debt, with the average amount rising to $1,223 from $1,181 last year.

Policy Shifts: Trade Tensions Ease, Debt Collections Resume

Investors are also watching policy moves from the Trump administration. The Office of the U.S. Trade Representative announced it will delay planned tariff hikes on Chinese semiconductors until June 2027, an 18-month reprieve that signals a desire to cool trade hostilities. Domestically, however, a potential headwind is forming. The Education Department plans to start garnishing the wages of defaulted student loan borrowers in early January, a move that could impact the spending power of more than 5 million people.

Big Tech's M&A Push

Despite the macroeconomic uncertainty, the tech sector isn't sitting still. Enterprise software giant ServiceNow announced its acquisition of cybersecurity startup Armis for $7.75 billion in cash. The deal is a strategic play to bolster its security capabilities in the AI era. This M&A activity, along with strong performance from names like Alphabet and Nvidia, has helped buoy the broader market.