The following is a guest editorial courtesy of Carolane de Palmas, Markets Analyst at Retail FX and CFDs broker ActivTrades.

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As December begins and investors look toward 2026, a familiar question returns to Wall Street: will the traditional Santa Rally materialize this year? After a turbulent 2025 marked by concerns about the value of AI-related stocks, tariffs in the U.S., trade tensions, geopolitical uncertainty, and shifting Federal Reserve policy, the potential for a year-end rally remains one of the most hotly debated topics among traders and investors alike.

Understanding the Santa Rally Phenomenon

The Santa Rally is a well-established seasonal pattern on Wall Street, first documented by Yale Hirsch in 1972, which describes the stock market’s historical tendency to register gains during a specific seven-day period spanning the turn of the year (5 last trading days of the year and the first two of the following year).

Historical data tracked since 1950 confirms the statistical significance of this pattern for the S&P 500 (USA500) index. The index has delivered an average return of approximately 1.3% during this period and the market has experienced positive performance roughly 79% of the time during the Santa Rally window.

A successful Santa Rally often signals broader market health and can set the tone for the entire following year. Historical data reveals that when Santa “delivers,” January typically posts average returns of 1.4% for the S&P 500, and the full year ahead averages gains of 10.4%. Conversely, when the Santa Rally “fails to appear,” January averages negative 0.2% and the following year is up “just” 6.1%.

What factors typically support this year-end phenomenon?

Holiday optimism naturally influences investor psychology, with the festive season fostering a more positive outlook.

During this specific year-end period, a high number of institutional investors—such as portfolio managers and fund traders—take vacations, which leads directly to a lower overall trading volume and creates less resistance to upward price movements. Fund managers engage in year-end portfolio adjustments, often reallocating capital and “window dressing” their holdings to present stronger portfolios to clients.

Additionally, tax-loss harvesting ends, removing selling pressure as investors stop dumping losing positions. Finally, anticipation of fresh capital inflows in January, as individuals and institutions deploy new funds, creates forward-looking momentum.

The Case for a Santa Rally in 2025

The Federal Reserve cut interest rates by 25 basis points in October, bringing the benchmark rate to a range of 3.75%-4%. While Fed Chair Jerome Powell threw cold water on December rate cut expectations during his post-meeting comments, market sentiment has recently shifted.

As of early December, traders are pricing in an 87% probability of another rate cut at the December 9-10 meeting, up from just 63% a month ago. Any additional monetary easing would provide support for risk assets like the equity market heading into the new year.

Adding to the rate cut optimism, President Donald Trump announced on December 1st that he has selected his nominee for the next Federal Reserve chair, though he hasn’t revealed the name yet. White House adviser Kevin Hassett appears to be the frontrunner, according to widespread speculation.

This leadership transition—set to take effect when Powell’s term expires in May 2026—could significantly influence market psychology heading into year-end. If investors perceive the incoming chair as dovish and supportive of lower rates, it could fuel additional bullish sentiment during the Santa Rally window. The potential composition of the Fed board under Trump’s second term also factors into market expectations.

Stephen Miran is another of Trump’s advisors serving on the central bank’s board, alongside two members carried over from Trump’s first term: Christopher Waller and Michelle Bowman. A pending legal case involving Lisa Cook in January could potentially open another position. Combined with Powell’s replacement, Trump appointees could command a 5-2 majority on the board, suggesting a more accommodative monetary policy stance ahead.

While this raises questions about central bank independence, markets may initially react positively to the prospect of sustained rate cuts, even if inflation remains elevated.

Despite November volatility that saw the Nasdaq snap a seven-month winning streak, the major indices remain remarkably close to record highs. The S&P 500 currently sits within 1% of its all-time high, while the Nasdaq is approximately 3% below its peak. After sharp selloffs earlier in November, markets staged a powerful rebound during Thanksgiving week, with the S&P 500 surging nearly 4%, the Nasdaq leaping over 4%, and the Dow jumping more than 3%.

A week ago, major strategists maintained bullish outlooks for the end of the year. JPMorgan targets the S&P 500 at 7,500 by year-end 2026, representing around a 10% rally from current levels around 6,810. HSBC shares the same 7,500 target, while Deutsche Bank projects an even more aggressive 8,000. The banks cite continued AI-driven capital expenditure and productivity gains as primary catalysts.

The holiday shopping season could provide additional support. Consumer spending has remained resilient throughout 2025, and record-breaking holiday sales would boost consumer discretionary stocks and reinforce confidence in economic strength. Early indicators from Black Friday and Cyber Monday will be critical data points.

Why the Santa Rally Might Not Happen This Year

Studying historical data doesn’t guarantee future results. Last year’s Santa Rally never arrived. The S&P 500 declined more than 2% in December 2024, marking only the third monthly decline of the year despite the index’s impressive 23% annual gain. And the index posted a decline during every single trading day between Christmas and New Year. This breakdown of seasonal patterns raises questions about their reliability in the current market environment.

Several strategists warn that 2025 has defied seasonal norms consistently, as the year has been marked by extraordinary events: the DeepSeek AI disruption at the beginning of the year, President Trump’s tariff announcements in April, and ongoing concerns about AI valuations, among others. These factors have created a market environment where traditional playbooks simply haven’t worked.

Federal Reserve policy uncertainty remains a significant concern. Despite the recent shift in rate cut expectations, the central bank’s overall trajectory for the end of 2025 and for 2026 remains unclear. Fed officials have expressed “strongly differing views” about appropriate December policy, with some members preferring to wait before cutting again, while others advocating for new cuts. This uncertainty creates hesitation among investors.

The value of major U.S. stock indices are currently raising concerns as they trade at elevated multiples, frequently nearing record highs, a direct result of the strong market gains seen among tech and AI-related stocks since 2024. Data indicates that since late 2022, AI-associated companies have been highly influential, driving about 75% of the S&P 500’s total returns, 80% of its earnings growth, and 90% of the growth in corporate capital spending.

For some, these figures suggest that AI represents more than speculative interest, delivering real economic benefits by enhancing productivity and supporting company profit margins throughout the economy. However, the high valuation levels have prompted high-profile short sellers to bet against the AI sector, a move that introduces caution and highlights concerns over the potential formation of a speculative bubble.

Additionally, broader economic concerns including cooling labor market data, mounting debt levels, and lingering effects from the government shutdown create macroeconomic headwinds.

How Should Investors and Traders Approach This December?

If a Santa Rally does materialize, certain sectors appear better positioned to benefit than others.

Technology remains the primary candidate. Growth stocks, especially the tech sector, historically outperform during periods of falling interest rates and improved risk sentiment. However, investors should note that recent AI concerns have created some caution from market participants.

Consumer discretionary stocks represent natural beneficiaries of holiday season strength. Companies exposed to retail, e-commerce, leisure, and entertainment typically see both operational and sentiment-driven gains during this period. Strong holiday sales data would provide fundamental support beyond seasonal patterns.

Financial stocks could benefit from improved market conditions and year-end trading activity. Additionally, if rate cuts materialize, banks with significant floating rate debt exposure would see reduced pressure on balance sheets and earnings.

Conversely, defensive sectors like healthcare and utilities, along with commodity-exposed industries, typically show less sensitivity to Santa Rally dynamics and may underperform if risk-on sentiment dominates.

Active investors have several strategic methods to gain exposure to these stocks, depending on their risk tolerance, capital, and desire for direct involvement. Stock selection allows for targeted positioning in sectors with the highest probability of outperformance. Sector-focused ETFs provide diversified exposure to these themes without individual stock picking risk, while broad market ETFs tracking market indices offer participation in overall market gains while minimizing sector-specific risks.

Finally, you should monitor early indicators to decide about your year end strategy. The first days of December, along with holiday shopping data from Thanksgiving weekend through Cyber Monday, could provide valuable signals about whether seasonal momentum is building or faltering. Corporate earnings commentary and consumer spending reports will be particularly telling.

Bottom line

As we enter the final month of 2025, the potential for a Santa Rally exists, but it’s far from guaranteed. The historical pattern favors stock market gains during this period, and several supportive factors—including potential Fed rate cuts, proximity to record highs, and strong Wall Street projections for 2026—create a foundation for year-end strength.

However, 2025 has consistently defied seasonal expectations, and last year’s unprecedented reverse Santa Rally serves as a stark reminder that historical patterns can break down. Elevated valuations, Fed policy uncertainty, and AI bubble concerns, all suggest caution is warranted. The next couple of weeks will reveal whether 2025 returns to traditional seasonal patterns or continues its trend of defying historical norms.

Sources: Business Insider, CNBC, Nasdaq, LPL Research, Reuters, J.P. Morgan

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