TLDR
- Wall Street strategists say the traditional December Santa Claus rally may not happen in 2025 due to unusual market conditions
- The year has seen extreme volatility from events like the DeepSeek meltdown in February and Trump’s tariff announcement in April
- Options market shows bearish sentiment with investors buying more downside protection instead of expecting seasonal gains
- Markets now price in an 83% chance of a Fed rate cut in December, up from 30% last week
- S&P 500 companies grew profits by 13.4% in Q3, marking the fourth straight quarter of double-digit gains
December usually brings good news for stock investors. The Santa Claus rally, a seasonal pattern where stocks rise after Thanksgiving, has been a reliable tradition on Wall Street. This year looks different.
Market strategists say the usual December strength may not materialize in 2025. Amy Wu Silverman from RBC Capital Markets told Yahoo Finance that none of the months this year have followed their typical seasonal patterns.
The year has been marked by unusual volatility. In February, the DeepSeek meltdown rattled markets. President Trump announced surprise tariffs in April, creating more uncertainty for investors.
These events pushed stocks to record highs before volatility returned in recent weeks. AI valuations have also created concerns among investors throughout the year.
Options Market Shows Caution
Silverman noted that the options market reflects bearish sentiment. Investors are buying more downside protection rather than betting on seasonal strength. “I don’t know if we’ll get that Santa rally, but we’ll definitely get perhaps another volatility pothole or rally in volatility,” she said.
Omar Aguilar, CEO of Schwab Asset Management, sees similar risks. He pointed to uneven economic data following the government shutdown and early signs of leadership rotation across sectors.
Megacap tech stocks have swung sharply in recent weeks. These movements have driven both market rallies and pullbacks. The setup for a traditional December advance is less clear than usual.
“The opportunities for a catalyst that will propel the market up don’t seem to be that strong this time,” Aguilar said. Even a potential Fed rate cut may not be enough to guarantee a December rally.
Federal Reserve Rate Decision Looms
Rate-cut expectations have changed dramatically in recent months. Markets now price in an 83% chance the Federal Reserve will cut interest rates at its December meeting. Last week, that probability stood at just 30%.
Aguilar said the recent shift in rate-cut expectations could provide support for stocks. However, the outcome remains uncertain. The bigger driver over time will be the return on AI investments and how quickly those gains appear in the economy.
Many strategists still expect stocks to rise over the next 12 to 18 months. Some targets reach as high as 8,000 for the S&P 500. Corporate earnings have supported this optimistic long-term outlook.
S&P 500 companies grew profits by 13.4% in the third quarter, according to FactSet. Big Tech companies drove much of this expansion. This marked the fourth consecutive quarter of double-digit gains.
The profit growth rate exceeded the 10-year average of 9.5%. It fell short of the five-year average of 14.9%. These results keep the longer-term story intact even if the near-term path faces more bumps.
For investors navigating current uncertainty and increased volatility, Aguilar offered simple advice: “Rebalance. This is the time.” Wall Street continues to watch for catalysts that could drive markets higher as December unfolds.
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