The upward momentum in US stocks appeared to stall in early December, with markets nearly flat as the year's last full trading week concluded. However, analysts suggest this doesn’t rule out the anticipated "Santa Claus Rally."
The "Santa Claus Rally" refers to a seasonal trend where stocks historically tend to rise during the last five trading days of December and the first two of January. This year, the phenomenon is expected to begin on December 24 (Christmas Eve).
If the year-end rally materializes, it could set the tone for the new year—amid ongoing investor debate about how much longer the current three-year bull market can last.
Wall Street has long viewed this period as a barometer of market confidence. Historically, the absence of a year-end rally has often served as a warning signal. As Yale Hirsch, the late market analyst who coined and popularized the term, once said: "If Santa Claus fails to call, bears may come to Broad and Wall." (The New York Stock Exchange is famously located at the corner of Broad Street and Wall Street in Lower Manhattan.) In other words, if stocks fail to rise during this typically strong period, it may signal lingering investor caution heading into the new year.
Recent pressure on AI-related trades has added to market challenges. Despite these headwinds, some strategists argue the foundation for a year-end rally remains intact. The key question: Can the S&P 500 (SPX) achieve another record high before year-end? Dow Jones Market Data shows the index notched its 37th record close of 2024 on December 11, settling above 6,900 points.
"Conditions are lining up for the Santa Claus Rally, and we could see new highs by year-end," said Jeffrey Hirsch, editor of the Stock Trader's Almanac and son of Yale Hirsch.
**Is the Rally Locked In?** Analysts cite several factors supporting a pre-New Year uptick:
Hirsch noted in a phone interview that recent economic reports showing cooled November inflation and slower job growth could give the Fed more room to cut rates in 2025—a potential boost for risk assets like stocks.
History also favors the rally, as early-December weakness hasn’t typically derailed it. Since 1950, even in years when the S&P 500 started December negatively, it rose during the Santa Claus period 20 out of 26 times (77% win rate)—matching the overall historical average where the index gained 1.3% during the window, per Dow Jones data.
Hirsch added that recent price action suggests an imminent rebound. After a modest overbought pullback the past two weeks, key support levels held. "This kind of dip is normal seasonally and sets the stage for Santa’s arrival," he said.
**Broadening Rally** Investors are watching whether the rally can extend beyond megacap tech—a sign of durability into 2026. For instance, bank stocks have outperformed this month despite tech lagging. The Russell 2000 small-cap index (RUT) has beaten the S&P 500, while the equal-weight S&P 500 has topped its market-cap-weighted counterpart, signaling broader participation.
Sector rotation indicates major indices like the S&P 500 could withstand some tech weakness if other groups pick up the slack.
"Banks showing leadership is healthy—it lets AI sentiment reset without a 10% market correction," said Baird strategist Ross Mayfield. He noted similar trends in cyclical sectors like industrials, materials, and consumer discretionary, which are more tied to economic strength. "If these sectors rally alongside or instead of AI stocks, it reflects optimism about 2026’s economic backdrop," Mayfield added.
**AI Valuations Remain a Risk** Still, optimism isn’t without caveats. Brian Mulberry of Zacks Investment Management said investors still question whether AI stocks are overpriced, especially given massive infrastructure spending. While not calling it a bubble, he warned of red flags: "The scale of AI investment justifies high multiples, but any deviation from announced spending plans could trigger sharp downside."
Last week, Blue Owl Capital (OWL) exited a $10B data center project with Oracle (ORCL), citing concerns over the tech firm’s rising debt and AI expenditures—a notable cautionary signal.
*Disclaimer: This content is for informational purposes only and not investment advice.*
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