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The Rally Reborn: Santa Claus Comes Knocking at Street’s Year-End Party

Dec 22, 2025 02:30:00 -0500 by Martin Baccardax | #Markets #Barron's Take

So-called Santa Claus rallies typically come in the final few trading days of the year. (Bryan R. Smith / AFP / Getty Images)

Key Points

U.S. stocks are looking to reverse an unusual December slump following a tame reading on inflation and some positive signals about artificial- intelligence demand. That strengthens the case for a Santa Claus rally over the 2025 home stretch.

The S&P 500 remains in negative territory for the month and ended last week modestly in the red, despite a rally that added 1.7% to the benchmark on Thursday and Friday. A softer-than-expected November inflation reading and data showing a further weakening of the job market stoked bets on more Federal Reserve interest-rate cuts, while a robust near-term revenue outlook from AI chip maker Micron Technology offered reassurance about the AI trade.

The December slump has perplexed investors, given that the final month of the year is historically one of the strongest in terms of stock performance, with an average gain of around 1.4%. Merger activity, improving sentiment among retail investors, and record inflows to U.S. stock funds should have supported markets as well.

So what’s the problem?

Some grim corporate forecasts are part of the picture. But more broadly, the sustainability of the AI investment boom remains a concern, as are the high valuations of megacap tech stocks. An index of the so-called Magnificent Seven is around 0.4% higher on the month, although stocks such as Nvidia , Microsoft , and Alphabet have all booked losses since the Thanksgiving holiday.

“There’s no doubting the validity of AI, but there has been very little clarity on what, or when, investors could see a return,” said David Morrison, senior market analyst at Trade Nation.

“There are also questions over Nvidia,” he said. “The stock market darling lost around a fifth of its value at one stage last month, and a rebound in early December reversed quickly.”

Investors may also not be fully confident that the November reading of the consumer price index provides an accurate reading of price pressures in the world’s biggest economy. The government shutdown left gaps in the data as the government shutdown disrupted the collection of data.

“Given that Fed Chair Powell suggested last week that policymakers would put less weight on the shutdown-affected data, it makes sense that market participants are skeptical,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

This week’s increase in interest rates by the Bank of Japan is another complication. It has not only narrowed the gap in yields between U.S. Treasury bonds and Japanese government debt, making the latter more attractive to domestic Japanese investors, it has also notably weakened the yen.

That is raising the prospect that Japan’s Ministry of Finance could intervene in the market to prop up the currency. And that could trigger an unwinding of the so-called yen carry trade, in which investors borrow the Japanese currency to invest abroad. The last major move by the ministry, in the summer of 2024, led to a three-day, 6.1% pullback for the S&P 500, as well as a surge in the Cboe Volatility Index, or VIX.

“Maybe we’re going to see some intervention here if the big move we’re seeing in the yen continues,” said John Hardy, global head of macro strategy at Saxo Bank. “We could the market taking care of itself in this respect, but the forces that have been unleashed might take some official moves to counter them.”

Alexander Guiliano, chief investment officer at Resonate Wealth Partners, is still betting on a late-December comeback for the benchmark.

“There is still time for stocks to stage a Santa Claus rally, which historically comes during the final few trading days of the year,” he said, referring to the gains that normally accrue from the day after Christmas through the second trading day of January.

“Even though markets have been choppy for about six weeks, the backdrop remains strong and this contraction in valuations is presenting opportunities for investors who don’t have enough stock exposure,” he said.

Wall Street is definitely upbeat about the new year. The median price target for the S&P 500 for the end of 2026 is around 7600 points, a bit more than 12% above current levels. Corporate earnings, meanwhile, are expected to grow by around 15%, based on forecasts collected by the London Stock Exchange Group.

If both of those forecasts prove accurate, stocks will likely become modestly less expensive over the coming year. Earnings would rise faster than index prices, reducing the price/earnings ratio for the S&P 500, which is an important concern among investors.

Tax relief and spending boosts from the One Big Beautiful Bill Act, the continuing surge in AI-data center spending, and President Donald Trump’s desire to “run the economy hot” into next year’s midterm elections are also likely to act as a tailwind for stocks for the bulk of next year.

“Capital spending, bolstered by front-loaded fiscal stimulus, as well as continued consumption by a resilient U.S. consumer, is expected to sustain corporate profit growth at double-digit rates in 2026, leading to positive yet more modest equity returns,” said Scott Glasser, chief investment officer at ClearBridge Investments.

December, by contrast, might provide just the kind of breather a healthy market needs.

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