A subdued pre-Christmas session on Wall Street left major stock indices hovering near historic highs on Wednesday, as investors assessed recent gains and fresh labour market data at the opening of the traditional "Santa Claus Rally" window.
Markets Pause at Critical Seasonal Juncture
The trading day was relatively quiet, with the S&P 500 showing little change as the period historically known for seasonal gains commenced. This timeframe typically includes the final five trading days of the year and the first two of the new year. Bond markets saw fluctuations, the U.S. dollar held at its lowest level since October, and gold prices remained near a record high.
This calm atmosphere stands in stark contrast to the extreme volatility witnessed earlier in the year, which was driven by tariff tensions and pushed equities toward a bear market. Since that turbulence, a powerful rally has taken hold, characterized by investors quickly buying any market dips and a prevailing "fear of missing out" sentiment.
Trader Bets Diverge from Fed Forecasts
Despite a recent pause in the market's exuberant run—partly due to questions about the sustainability of the artificial intelligence boom—optimism about corporate profits persists. This optimism is fueled by expectations that the Federal Reserve will have room to further cut interest rates in 2026.
Market participants are currently parsing economic data and maintaining their projection for two quarter-point rate reductions by the Fed next year. This outlook is more aggressive than the median forecast of Fed officials themselves, who have signaled only one cut.
Supporting the view of economic resilience, the latest data showed U.S. unemployment benefit applications fell last week, though seasonal factors influenced the numbers. The figures underscore a labour market that has maintained relatively low layoff levels throughout a year of economic uncertainty.
Analysts See Foundation for Further Gains
Financial institutions are advising clients to prepare for potential continued market advances. Ulrike Hoffmann-Burchardi of UBS Global Wealth Management reiterated an attractive rating on U.S. equities this week, pointing to compelling opportunities in technology, health care, utilities, and financials.
"We believe investors should position for further advances in equity markets," Hoffmann-Burchardi stated, suggesting a broadening foundation for gains beyond the mega-cap tech stocks.
Echoing a cautiously optimistic tone for the year ahead, Magdalena Ocampo at Principal Asset Management noted, "For now, we expect two rate cuts next year, likely in the first half, and, provided unemployment doesn’t spiral, a resilient economy, cooling inflation and easier policy should be supportive for risk assets."
At the close of the shortened session, the S&P 500 was essentially flat. The yield on the benchmark 10-year U.S. Treasury note dipped slightly to 4.15%, and the dollar index declined by 0.1%. Trading at the New York Stock Exchange concluded at 1 p.m. local time on December 24.
