Data showing US inflation cooled at a startling clip last month ignited stock and bond markets, bolstering bulls with prospects for more decisive Federal Reserve rate cuts in 2026. Bitcoin rallied.

Despite numerous caveats surrounding another high-profile report impacted by the government shutdown, traders welcomed the slowest increase in consumer prices since early 2021. The S&P 500 halted a four-day slide, with tech shares leading the charge after Micron Technology Inc.'s solid outlook.

Treasury yields dropped across the curve, joining a slide in the dollar as the latest data offered some relief to traders worried about more pronounced inflation that could keep a lid on rate cuts.

The core consumer price index, which excludes the often-volatile food and energy categories, increased 2.6% in November. That compares with a 3% annual advance two months earlier. The overall CPI climbed 2.7% in November from a year ago.

"November's inflation undershoot has armed Fed doves with strong ammunition for a January rate cut," said Seema Shah at Principal Asset Management. "It's just one month of data, and distortions can't be ruled out, but the sharp drop in annual inflation leaves the Fed with little excuse not to respond to rising unemployment."

While there's more relevant data to come before the January meeting, this week's numbers tilt the balance firmly toward the doves, Shah said. She still expects two cuts in 2026, but says today's CPI print raises the odds they'll land in the first half of the year rather than the second.

A busy day for global monetary policy decisions saw the euro paring its drop after the European Central Bank left interest rates unchanged as inflation hovers around target. The Bank of England cut rates to the lowest in almost three years, but the guidance was seen as more hawkish.

President Donald Trump looked to reassure Americans concerned about the rising cost of living during a prime-time address late Wednesday from the White House. Trump also said he'll "soon announce our next chairman of the Federal Reserve, someone who believes in lower interest rates, by a lot, and mortgage payments will be coming down even further."

The S&P 500 rose about 1%. Micron jumped 14%. The yield on 10-year Treasuries slid four basis points to 4.11%. The dollar fell 0.1%. Bitcoin surged 2.5%.

"With inflation coming in meaningfully better than expected, we continue to believe that the Fed will cut rates at least twice next year irrespective of the new Fed chair," said Scott Helfstein at Global X. "The numbers this morning helped support the Fed narrative that the risks to the job market were rising faster than the risks to inflation."

The latest inflation report vindicated the Feds dovish stance at its most recent meeting and could raise the likelihood of another rate cut in January, according to Stephen Kates at Bankrate Financial. 

"There will be plenty of economic data to evaluate between now and then, but another cooler-than-expected inflation reading would suggest that the Federal Reserve may already be ahead of its inflation targets for 2026," he said.

"Investors cheered the latest inflation report," said Jeff Roach at LPL Financial. "We may have some more hot readings as demand ticks higher from larger than expected tax returns in early 2026 but we should expect inflation to cool in the latter part of next year."

Overall, he notes we may get some bumpy inflation readings in the next few months, but his year-end forecast for inflation is 2.5%, giving the Fed opportunity to cut rates a few times next year.

While the November CPI print is admittedly noisy, it offers hope to a different inflation narrative than what we've seen over the past six months, said Bret Kenwell at eToro. We'd need to see further inflation data confirm this narrative change, he added.

"Although this is just one inflation reading — and admittedly not the Fed's preferred inflation gauge — easing inflation concerns could open the door to a more accommodative Fed moving forward," Kenwell said. "That has markets rallying this morning and, once we get through December's options expiration on Friday, it could help grease the wheels for a year-end rally."

There is clearly room for the Fed to keep cutting rates in order to support the labor market and if the doves win out then we are likely to see stock prices supported – and move higher, according to Chris Zaccarelli at Northlight Asset Management.

"While next year will undoubtedly bring new challenges, heading into the end of the year there should be room for the market to move higher as corporate profits are increasing, the GDP is growing and inflation (for now) remains in check," he said.

The steady downtrend in shelter costs is starting to bring down core inflation, and this is good news for the Fed because shelter is the biggest category in overall inflation, according to David Russell at TradeStation.

"The disinflationary trend may continue this month because oil has dropped and home prices are still under pressure. This is a relief for people worried about a hawkish start to the year," he said. "A Santa Rally could still be in the cards."

US stocks are heading into 2026 with positive momentum and a host of bullish forecasts at their backs. For the fourth year of strong gains that many predict to play out, they must still overcome plenty of potential threats. 

For a start, valuations are already rich and the group of stocks leading the gains is relatively narrow, a risky setup in itself. A lot is riding on AI winners proving that, rather than forming a bubble, they have further to climb.

About 57% of participants in a Deutsche Bank survey said a potential plunge in AI valuations poses the biggest risk to market stability in 2026. More than a quarter warn of potential market turmoil from a new Fed chair pushing for aggressive rate cuts.

The latest bout of volatility in US equity markets highlights a risk that strategists at JPMorgan Chase & Co. have been warning about: "extreme crowding" in stocks that have rallied hard this year.

"These companies are more sensitive to shocks, leaving them at risk of sudden repricing," wrote Bram Kaplan, JPMorgan's head of Americas equity derivatives strategy. "Low Vol stocks possess a more attractive risk-reward profile" he added, compared to the more volatile stocks, many of which are "second order speculative AI plays."