Both the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQ) closed higher on Monday as the shortened holiday trading week kicked off. That comes as the Volatility Index (VIX) tumbled to a three-month low ahead of the “Santa Rally,” which begins on December 24 this year and occurs during the last five trading days of the year and the first two trading days of January. Since 1950, the seven-day period has been positive 79% of the time with an average return of 1.3%.
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Wall Street expects the S&P 500 to deliver an average return of 11% in 2026, powered by rate cuts, lower taxes, and earnings growth. In addition, UBS points out that December is the second-best performing month for the benchmark index with an average return of 1.3%. July takes home first place with an average 1.7% gain.
UBS forecasts one rate cut during the first quarter of 2026 and expects the S&P 500 to climb to 7,300 by June 2026 and 7,700 by the end of 2026. “So, we believe investors should position to gain from the expected equity rally in the coming year, adding exposure to tech, health care, utilities, and banking for those underallocated to the US market,” said the firm.
Despite the optimism, several experts have sounded the alarm on a growing wave of positive sentiment. Wall Street’s SPX price targets for the new year range between 8,100 and 7,000, or a difference of 16%. “When S&P 500 targets cluster this tightly, it suggests expectations are well priced and forecasts can become fragile — that leaves the market more sensitive to incremental disappointments,” said Roundhill Financial CEO Dave Mazza. Furthermore, BNP Paribas U.S. Head of Equity and Derivative Strategy Greg Boutle warns that stocks are more vulnerable to negative catalysts when most investors have similar views.
Meanwhile, Fed Governor Stephen Miran warned that the economy is at risk of a recession if the Fed chooses to delay rate cuts. Miran has advocated for outsized 50 bps reductions at the last few Federal Open Market Committee (FOMC) meetings, citing a soft labor market. His warning comes as the unemployment rate rose to a four-year high of 4.6% in November. At the same time, the market expects the Fed to halt its cutting cycle at the January FOMC, with CME’s FedWatch assigning 80.1% odds to that outcome.
The S&P 500 (SPX) closed with a 0.64% gain, while the Nasdaq 100 (NDX) returned 0.46%.
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