A Key Piece to the Stock Market’s December Rally Is Beginning to Fall Into Place

The stock market’s traditional December rally could take the S&P 500 close to 7000. (NYSE)

Key Points

• Retail investor bullish sentiment on stocks rises by 12 percentage points to 44.3%, while bearish sentiment falls by 12 percentage points to 31%.
• Third-quarter S&P 500 earnings are projected to increase by 14.7% to $601.5 billion, a $32 billion increase from initial forecasts.
• The S&P 500 has gained in six of the last seven sessions, nearing its October all-time high by approximately 0.6%.

U.S. stocks may have found a key early December catalyst to deliver the end-of-year rally analysts have been forecasting—and it’s likely tied in part to this week’s rebound in Bitcoin .

Retail investors have turned sharply bullish on stocks heading into the final weeks of the year, according to the reading of sentiment from the American Association of Individual Investors released Wednesday, as third-quarter earnings season draws to a close and Bitcoin prices recover from their slump in late November.

Around 44.3% of those polled in the AAII’s weekly survey said they were bullish on stocks over the next six months, a 12-percentage point improvement from the prior reading and just shy of the highest of the year from early October.

Those defining themselves as bearish on stocks also fell by around 12 percentage points from the last survey to 31%, a level that essentially matches the poll’s historical average.

Adam Turnquist, chief technical strategist at LPL Financial, said retail investors remain a crucial factor in the market’s ability to extend gains into year-end.

“While last week’s rally was impressive, it leaves the S&P 500 with a concerning trend of lower highs and lower lows since October,” he said. “And a missing piece of the recovery puzzle has been retail investors, who have not shown up to buy the latest dip.”

“According to VandaXasset data, the retail cohort—who have steadily supported stocks since April—have been de-risking U.S. equity positions since October,” he added.

Bitcoin prices are likely a key component in the sentiment turnaround, given their 10% gain over the past three sessions, but the advance only occurred during the latter portion of the survey.

Stronger-than-expected third-quarter earnings also are likely to have supported retail investor sentiment, with LSEG data suggesting collective S&P 500 profits will rise by around 14.7% from last year to $601.5 billion. That’s a near $32 billion increase from forecasts at the start of the reporting season.

Around 36% of AAII respondents said profit outlooks for the current quarter were better than they had expected, while around 40% said they were largely in-line with what they were anticipating.

Stocks are now on a steady but muted path higher into next week’s decision on interest rates from the Federal Reserve, with the S&P 500 having posted gains for six of the past seven sessions to peg it within around 0.6% of the all-time high it notched in late October.

Next week also marks the start of the market’s traditional December rally based on data from Bank of America going back as far as 1928.

Gains for the benchmark over the first 10 days of the month have produced an average return of 0.05%, while the last 10 days usually see a much stronger advance of around 1.17%.

If that were to materialize, the S&P 500 would close out the year at around 6930 points, with its 2025 advance at an impressive 18%.

A Fed rate cut on Dec. 10, coupled with dovish signals heading into 2026, could stoke an even stronger response and take the benchmark past the 7000-point mark, and possibly deliver the third consecutive year of 20%-plus gains. Investors haven’t seen that since the mid-1990s.

“We’re in an elf rally, but we’re on our way to a Santa Claus rally,” said Chris Hyzy of Bank of America Private Bank during an interview Wednesday with CNBC.

Write to Martin Baccardax at martin.baccardax@barrons.com