As the last week of the year is upon us, investors are watching for the Santa Claus rally. This seasonal pattern refers to the S&P 500’s (SPX) tendency to rise during the final five trading days of December and the first two of January.
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Since 1950, this seven-day stretch has averaged a 1.3% gain. It has been positive in roughly 75% of years. However, this year’s setup is more complicated. Rather than setting up for a strong run, the market seems more likely to confirm stability than deliver big gains.
Fed Cut, Strong Year, Slower Moves
In December, the Federal Reserve lowered its benchmark rate by 25 basis points to a target range of 3.50% to 3.75%. The move followed earlier cuts that began in late 2024. The central bank made clear that this is not the start of a deep easing cycle. Instead, officials signaled that further rate cuts will depend on incoming data.
Markets have reacted with some caution. Yields moved slightly lower, and equities gained ground, but not by much. The Fed’s tone capped hopes for a major policy shift.
The S&P 500 is up nearly 17% this year, following a 23% gain in 2024. It remains near record levels, helped by strong tech stocks and steady earnings. However, with valuations stretched and economic growth slowing, gains are likely to come in smaller steps.
AI Leadership, Consumer Fatigue
As in recent years, tech stocks continue to lead the market, especially those linked to AI. Companies such as Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), and Nvidia (NVDA) have pushed capital spending to record highs. Their earnings have mostly beaten expectations, and investor demand remains strong.
At the same time, some investors have begun taking profits on high-growth names. Valuations in tech are high, and even small misses on growth or margins could lead to sharper pullbacks. This is a key reason why the market may not break out even with Fed support.
Meanwhile, the consumer backdrop looks softer. Layoffs and higher unemployment rates are starting to weigh on household spending. As a result, holiday retail sales are being watched closely. If they come in below expectations, this could limit gains in consumer stocks and pull down sentiment.
In retail, stronger brands and value chains may hold up better. But many discretionary and lower-quality companies are under pressure from weaker demand and still-high funding costs. Companies such as Walmart (WMT), Costco (COST), and Amazon (AMZN) are better positioned owing to scale, pricing power, and online reach. At the same time, discretionary and lower-quality names such as Foot Locker, Bath & Body Works (BBWI), and Big Lots (BIGGQ) remain under pressure from weaker demand, higher promotions, and funding costs that have not yet fully declined.
What Success Looks Like
At the moment, if a Santa rally does occur this year, it will likely be modest. A gain of 1% to 2% in the S&P 500 would match historical norms. This would likely come from stable earnings, strong tech names, and improved sentiment in other sectors like financials and industrials.
On the other hand, if the market fails to rally at all, it would be the second straight year the pattern breaks. This would not mean a bear market is coming. But it could be a warning sign that investors are turning more cautious heading into 2026.
Takeaway for Investors
This year’s Santa rally is about stability rather than excitement. A small gain would confirm that investors still see strength in the U.S. market, even with slower growth and limited rate cuts ahead.
For those with gains in 2025, this may be a good time to review exposure and trim risk. For others, the period could offer chances to add to high-quality names with strong earnings and cash flow. Either way, the focus should be on selectivity and balance.
Merry Christmas and happy holidays to all our readers!
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