Can U.S. Stocks Stage a Santa Rally After Fed's Hawkish Signal?

The Federal Reserve's latest interest rate projections, unveiled Wednesday, forecast just two rate cuts in the coming year, down from the previously expected four. The revision sent stock markets tumbling, while boosting yields and the dollar.

U.S. stocks tumbled Wednesday, with the $DJIA(.DJI)$   plummeting more than 2.5%, the $NASDAQ(.IXIC)$   sliding over 3.5%, and the $S&P 500(.SPX)$   losing nearly 3%. The $Russell 2000 Index (.RUT.US)$, which tracks small-cap stocks, plunged 4.4%, marking its steepest decline since June 2022. On Thursday, the Dow eked out a gain, ending a 10-day losing streak.

In December, U.S. markets have posted muted returns. The Nasdaq Composite Index briefly topped 20,000 this month but has advanced just 0.8% year-to-date. The S&P 500 has fallen 2.74%, while the Dow has dropped 5.72% for the month.

Is the Santa Claus rally on the horizon?

The Santa Claus rally typically covers the last five trading days of the year and the first two of the new year, spanning this year from Dec. 24 to Jan. 3.

Since 1950, the S&P 500 has risen 80% of the time during this period. According to Bank of America, the average gain in this window since 1928 is 1.6%.

Wall Street analysts appear unfazed by this week's market volatility in response to the Federal Reserve meeting, suggesting it won't derail this year's "Santa Claus rally." Instead, they believe the market overreacted to the Fed's hawkish stance, viewing Wednesday's sell-off as a buying opportunity.

Citi's Chief U.S. Economist Andrew Hollenhorst suggests that the Fed's hawkish stance may wane once labor market weaknesses emerge. He anticipates that continued softness in the labor market could lead the Fed to cut rates more swiftly than currently expected, with a dovish pivot from Powell and the committee likely in the coming months.

Carson Group's Chief Market Strategist Ryan Detrick remains optimistic about year-end stock performance. He predicts a news lull following the Fed's final major event of the year, a period when stocks historically perform well. Additionally, with the Dow having endured ten consecutive losses, stocks appear oversold, nearing levels seen earlier this year when the market bottomed.

Wedbush, in a Wednesday evening report, labeled the selloff as a "buying opportunity to own tech winners poised to benefit from a robust AI Revolution into 2025," forecasting at least a 25% rise in tech stocks by 2025.

The firm also noted that while the Fed's policies and tariffs under President Trump might signal some "bumpy days," the overall outlook for tech and risk assets remains positive. They expect the Trump administration to introduce more AI initiatives, benefiting major players like $Microsoft (MSFT.US)$, $Amazon (AMZN.US)$, and $Alphabet-C (GOOG.US)$. Additionally, tech stocks such as $Palantir (PLTR.US)$ are anticipated to gain from the Department of Defense's AI plans.

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