The year end tape is tilting back toward risk-on and Asia is next in line

Tilting back toward risk-on

Asian equity markets are stepping onto the floor with a constructive bias, taking their cue from Friday’s solid rebound in US stocks and the growing belief that the final stretch of the year still belongs to the bulls. Futures in the US are firmer, Australia opened higher, and early signals from Hong Kong and Japan point in the same direction. However, some of the moves are likely to look directionally louder than they really are, given thin holiday bid to offer spread liquidity. In that kind of tape, price action can look louder than it really is, as small tickets push the market further than usual, but the direction still matters. Bitcoin pushing higher only reinforces the sense that risk appetite is not retreating, it is regrouping.

Last week was a proper stress test. Doubts about AI valuation and the extent to which the Federal Reserve can realistically ease policy briefly knocked the market off balance. But the pullback never gained momentum. Dip buyers stepped in late, and by Friday, US equities had surged nearly one percent, erasing the weekly loss in one clean move. Volumes surged thanks to quarterly options and futures expiry, which acted like a forced clearing of the deck. What appeared to be uncertainty earlier in the week became positioning for a year-end push and a carry-through into 2026.

Talking to a few Singapore-based fund managers over the weekend, the mood was quietly pragmatic. Many are satisfied with this year’s gains and see little reason to chase late-season price action. A number are even trimming risk into year-end, content to protect what has already been earned rather than swing for extra yards.

And yet, even among that more cautious cohort, there is an acknowledgment that the path of least resistance still points higher. That does not imply straight lines or blind conviction. It reflects incentives. In a year where simply staying long equities paid almost by default, nobody wants to be the one manager explaining why they faded the final stretch and slipped down the leaderboard.

That minor tension is what will liely define the tape into year end.. Some are stepping back; others are still leaning in, and the price keeps moving because there are always marginal buyers. Asia, in that sense, is just the next runner in the relay, taking the baton and carrying it forward while the race is still on. That said, everyone knows what lies ahead in 2026. The two elephants in the room have not moved. AI valuation remains the central fault line and the question of whether the Fed can keep the engine humming with rate cuts is unresolved. For now, neither is stopping the tape. They are risks to manage, not reasons to abandon the ship.

In Asia, the immediate focus is China. Attention turns to the one-year and five-year loan prime rates, which are widely expected to remain unchanged for a seventh straight month. The signal there is not about what happens today, but what comes next. A softer economy heading into the fourth quarter has increased pressure on policymakers to lean more aggressively into support. Year-end policy meetings have already hinted at slightly more monetary easing in 2026, with the next rate cut likely early in the year, nudging lending rates lower and attempting to stabilize momentum before slowdown narratives harden.

Commodities add another layer of tension. Crude prices are back on the radar as the United States pursues a third oil tanker near Venezuela, part of an escalating blockade aimed at economically crippling the Maduro government. Energy markets have learned to respect these geopolitical pressure points, especially when the market bid to offer liquidity is thin and positioning is skewed bearish.

Globally, the calendar stays busy. Growth data from the UK and the US will help shape early-year expectations. At the same time, minutes from the Reserve Bank of Australia’s December meeting may offer clues on whether February brings a hike or continued patience. In Japan, Tokyo inflation and national labor data will feed directly into the debate around the Bank of Japan’s next steps after its cautious move last week. Each of these is a small gear in the larger machine, but together they shape the rhythm of global risk.

On the US rates front, Treasury yields edged higher on Friday after New York Fed President John Williams signalled no urgency to cut again, pointing to recent employment and inflation data. Cleveland Fed President Beth Hammack echoed that tone, reinforcing the idea that after a string of reductions, a pause may be appropriate. The data itself has not delivered a decisive signal either way, which is why the market remains comfortable pricing roughly two cuts in 2026. Hawks warn about inflation, but those concerns still feel louder than the evidence supports. Labour market risks continue to skew to the downside, and with limited clean data before the next meeting, current pricing for a modest chance of a January cut looks reasonable rather than reckless.

Put all of this together and the picture is familiar to anyone who has traded Santa rallies before. The tape is being supported by positioning, rate cut expectations,market based plumbing liquidity (Fed buying bond, is another man’s QE), and the absence of a catalyst strong enough to force de-risking. Volatility will not disappear, especially with AI valuation debates simmering beneath the surface, but for now, the market is choosing to look forward rather than flinch. Asia opens into that mood today, not euphoric, not complacent, just willing to stay long while the music is still playing.

The market is still running and nobody has reached for the whistle yet

Equity markets are gliding into the holidays with the quiet confidence of a tape that refuses to break. Liquidity is ample. Volatility is muted. And the belief that the Federal Reserve still has a few rate cuts left in its pocket has allowed risk assets to keep walking higher without much resistance. Put bluntly, if you were involved in equities in 2025, you had to work unusually hard not to post strong returns. Every major index finished the year with double digit gains. Every major North American sector stayed in the green. This was one of those years where beta alone paid the bills.

The undisputed engine of that performance was artificial intelligence. Even though the trade lost some momentum into year end, AI was the primary force shaping returns, narratives, and positioning throughout the year. It pulled the entire market forward, and in doing so it reshaped the index itself. The top ten stocks in the S&P 500 now account for more than forty percent of the index, a level of concentration driven almost entirely by AI linked names. Technology and communication services delivered gains north of twenty percent, closer to thirty in the latter case, but the ripple effects travelled far beyond Silicon Valley. The AI buildout spilled into heavy equipment, industrial machinery, HVAC systems, utilities, and even investment banks underwriting and financing the expansion. That kind of widening participation is typical when a bull market matures. The initial spark ignites the leaders, then the heat spreads across the forest.

Outside the United States, the most quietly impressive development of the year was Europe. After a dismal 2024 that produced barely any progress despite a roaring U.S. market, European equities staged a meaningful comeback. Major indices advanced between ten and twenty percent, leaving MSCI Europe broadly neck and neck with the S&P 500 in local terms. For a U.S. investor who stayed unhedged, a stronger euro turned that into something closer to a thirty percent gain, effectively doubling U.S. equity performance. Fiscal stimulus played a central role, particularly through stepped up defence spending, which revived growth expectations and restored some confidence to the region’s industrial base.

Hovering over all of this was the Federal Reserve, acting less like a referee and more like a coach who quietly keeps the game moving. After holding rates steady through August, the Fed delivered seventy five basis points of cuts by December, even as core inflation remained stubborn. More importantly, policymakers said and did just enough to keep expectations alive for further easing in 2026. Markets are pricing roughly sixty basis points of additional cuts. That matters because long running equity bull markets usually end when monetary policy turns restrictive, not when it is still easing. Right now, the policy backdrop is still lubricating the gears.

That brings us to the uncomfortable question hanging over every desk as we turn the calendar to 2026. Are we watching the late stages of a bubble, or simply a powerful trend that has further to run?

History suggests bubbles are not moments, they are processes. They unfold in stages, and the current AI driven boom fits that script remarkably well. There is a credible bull case and a credible bear case, and both can be true at the same time.

The bullish argument starts and ends with the Federal Reserve. Major equity cycles tend to die at the hands of aggressive tightening. The late nineties ended after sharp rate hikes. The mid two thousands ended after sustained tightening into 2007. The post pandemic rally broke only when inflation forced the most aggressive hiking cycle in decades. Today, we are in the opposite environment. The Fed is easing, and may ease more than the underlying data strictly requires. Historically, that is fuel for a bull market to accelerate, not stall.

Earnings reinforce that view. Third quarter results delivered roughly seventeen percent year on year growth, far above expectations that sat near eight percent at the start of the quarter. More than eighty percent of companies beat estimates, comfortably above normal hit rates. Looking ahead, consensus still sees calendar 2026 earnings growth holding near fourteen percent. Revenues, cash flow, and margins have remained resilient, with corporate profits near cycle highs as a share of GDP. Late cycle compression simply has not shown up yet.

Underpinning both growth and earnings is a very real capital spending boom. The data centre buildout is no longer confined to chips and software. It has pulled in industrial equipment, power infrastructure, HVAC systems, and natural gas networks. Nominal spending on software and equipment has been growing at a thirteen percent clip, the strongest outside the pandemic rebound since the late nineties, and contributed almost the entirety of real GDP growth in the first half of the year. This is not financial alchemy. It is bricks, steel, silicon, and electricity.

The bear case is equally grounded in history. Every building boom eventually flirts with excess. Hyperscalers are spending at a breathtaking pace, with combined capital expenditure approaching three hundred fifty billion dollars this year, multiples above pre pandemic levels. Firms that once printed free cash flow are leaning more heavily on financing, and investors will eventually demand evidence of payoff. While demand currently exceeds supply, technology has a habit of turning scarcity into surplus. Housing booms and dark fibre remind us how quickly that switch can flip.

Valuations amplify the risk. The S&P 500 trades around twenty three times forward earnings, at the very top of the last decade’s range and well above long run norms. Concentration has intensified, with AI names dominating index weightings. Elevated valuations alone do not end bull markets, but they shorten the margin for error. Stocks can move from expensive to very expensive, but the higher they climb, the more sensitive they become to disappointment.

There are also early signs of speculative heat. Margin balances have surged to record levels, growing far faster than underlying market capitalization. We are not yet at the extremes seen in prior peaks, but when leverage begins to outrun fundamentals in a market priced for perfection, it deserves respect.

So what is a bubble, really. True bubbles usually begin with genuine innovation and productivity gains. Prices rise. The story spreads. Speculation follows. Valuations stretch. Asset quality deteriorates. Financing becomes creative. Eventually, policymakers pull the punch bowl. Importantly, bubbles almost always last longer than skeptics expect, and they often reflect real transformation rather than fantasy. The dot com era was not wrong about the internet. It was simply early and excessive.

Viewed through that lens, we are likely several innings into this cycle, but not at the end. The next critical variable is policy. Further rate cuts could pour fuel on the fire. What to watch instead are signs of weakening cash flow, aggressive borrowing to fund data centres, and increasingly exotic financing structures creeping in from the shadows. If those appear, and if the Federal Reserve is forced into a policy reversal, the clock will finally start ticking.

Until then, the market remains upright, well supplied, and confident. The game is still on. The crowd is loud. And the whistle remains firmly in the referee’s pocket.