S&P 500’s December Slump Defies History—Will Santa Rally Still Deliver?

Wall Street's holiday script just got flipped. The S&P 500 is stumbling into Christmas, defying decades of bullish seasonal data. The so-called 'Santa Rally' period is officially here, but the market's showing up empty-handed.

The Ghost of Christmas Past

History books scream one thing: December tends to be kind to stocks. Analysts love trotting out the stats—average gains, win rates, the whole festive spreadsheet. This year? The market's ignoring the playbook. No gentle slope upward, just a lump of coal in the portfolio.

What's Stealing Christmas?

Forget reindeer—this sleigh is weighed down by real concerns. Inflation's sticky, rate cut hopes are getting delayed, and geopolitical grinches are lurking. The usual year-end momentum, where fund managers window-dress their holdings, has hit a wall. It's a reminder that past performance is just that: past. A favorite cynical jab in finance circles? 'Seasonal trends work until they don't—usually right after you bet your bonus on them.'

The Final Bell

So, does this kill the Santa Rally? Not necessarily. Markets are fickle, and sentiment can turn on a dime—or a dovish Fed whisper. But this December's weakness is a stark warning: don't blindly follow the calendar. Sometimes, the market gives you a gift. Sometimes, it just sends the bill.

TLDR

• The S&P 500 is down for December despite the month historically averaging 1.4% gains, breaking the usual year-end pattern.
• Concerns about AI investment sustainability, high tech stock valuations, and a potential yen carry trade unwinding are weighing on markets.
• A Bank of Japan rate hike has weakened the yen, raising fears of currency intervention that could trigger market pullbacks similar to summer 2024’s 6.1% S&P drop.
• The Santa Claus Rally period begins Wednesday and covers the last five trading days of December plus the first two of January.
• Wall Street analysts project the S&P 500 could reach 7,600 points by end of 2026, representing a 12% gain, with corporate earnings expected to grow 15%.

U.S. stock markets are experiencing an unusual December decline as the traditional Santa Claus Rally period approaches this week. The S&P 500 remains in negative territory for the month despite historically strong year-end performance.

December typically delivers average gains of 1.4% for stocks. This year has broken that pattern with the benchmark index ending last week slightly down despite a 1.7% rally on Thursday and Friday.

The late-week gains came after November inflation data showed softer price pressures. Job market data also indicated further weakening, which increased expectations for more Federal Reserve rate cuts.

Micron Technology provided positive news for the AI sector with a strong revenue outlook. The chip maker’s forecast helped ease some concerns about artificial intelligence investment returns.

Several factors are holding back the market despite positive signals. AI investment sustainability remains a key worry for investors who lack clarity on when returns will materialize.

The Magnificent Seven tech stocks show mixed performance this month. The group’s index is up just 0.4% for December while Nvidia, Microsoft, and Alphabet have all declined since Thanksgiving.

Nvidia lost about 20% of its value at one point in November. The stock rebounded in early December but that rally reversed quickly, raising questions about the AI chip leader’s momentum.

Tech Valuations Under Scrutiny

High valuations of large technology companies continue to make investors cautious. The price-to-earnings ratios for megacap stocks remain elevated compared to historical averages.

Data quality issues from the government shutdown have created uncertainty about inflation readings. Fed Chair Powell indicated policymakers WOULD give less weight to shutdown-affected data, making markets skeptical of November’s numbers.

The Bank of Japan raised interest rates this week, creating new complications. The MOVE narrowed the yield gap between U.S. Treasury bonds and Japanese government debt.

A weaker yen has increased the possibility of Japanese government intervention in currency markets. Such action could force an unwinding of the yen carry trade, where investors borrow yen to invest in other markets.

The last major Japanese currency intervention occurred in summer 2024. That move caused a three-day 6.1% pullback for the S&P 500 and a spike in the VIX volatility index.

Santa Rally Still Possible

The Santa Claus Rally period begins Wednesday and runs through the first two trading days of January. The seven-day stretch has never seen three consecutive years of losses, giving bulls reason for optimism.

Wall Street maintains an upbeat outlook for 2026 despite December’s weakness. The median analyst price target for the S&P 500 stands at 7,600 points, about 12% above current levels.

Corporate earnings are forecast to grow by 15% based on data from the London Stock Exchange Group. If both predictions prove accurate, stocks will become less expensive as earnings growth outpaces price increases.

Tax relief and spending from proposed legislation could provide support for equities next year. Continued AI data center investment and political factors heading into midterm elections may also help markets.

Stock index futures pointed higher Monday morning with Nasdaq 100 futures up 0.64%. S&P 500 futures ROSE 0.45% while Dow futures gained 0.21% as traders positioned for potential year-end strength.