Market embarks on early Santa Claus rally

[Ben Graham]

Those who hesitated have missed out. Although the Christmas rally typically encompasses the last five trading days of the old year and the first two of the new year, the S&P 500 has already started to gain value. Investors do not want to miss this momentum and are buying stocks. In both 2023-2024 and 2024-2025, the broad market index experienced declines, and it has never closed in the red for three consecutive times during this period of the year.

S&P 500 Christmas Rally

Pessimists point to the high fundamental valuations of tech companies, questioning their ability to generate profits commensurate with substantial investments, while expressing concerns about a prolonged pause in the Federal Reserve's monetary expansion cycle.

Optimists, on the other hand, pay tribute to the technology giants, which have been instrumental in driving the S&P 500 up by 17% since the beginning of the year. They focus less on the timeline for rate cuts and more on their scale. If Donald Trump can fill the FOMC with dovish members, his dream of reducing borrowing costs to 1% could become a reality.

It seems that those with a half-full glass are prevailing. The S&P 500 is confidently moving towards a recovery of its upward trend. Investors have recalled the principle, "the trend is your friend, so trade with the trend," and they are buying American stocks. Furthermore, Wall Street analysts are more united than ever. The divergence between the highest forecast for the broad market index in 2026 at Oppenheimer, which stands at 8,000, and the lowest forecast at Stifel Nicolaus, which is 7,000, is only 16%. When the majority sways in one direction, the crowd is often right, even though the risks of sharp movements in the opposite direction are increasing.

Dynamics of S&P 500 Forecast Deviations

It's important to note that analysts typically exhibit caution. At the end of 2024, the consensus forecast among Wall Street experts predicted a 9% rally for the S&P 500 in 2025. However, it may turn out that the broad market index exceeds that forecast by double. Likewise, few anticipated a twofold gain in the US equity market for 2023-2024, which ultimately happened.

Low evaluations begin with the observation that the price-to-forward-earnings ratio for S&P 500 companies is at its highest level since the dot-com crisis. Meanwhile, doubts about the effectiveness of artificial intelligence technologies could trigger a significant decline in the broad market index. This would dampen the wealth effect and risk reverting the US economy into a recession, similar to what occurred in 2001.

High valuations are associated with expectations of GDP acceleration fueled by the One Big Beautiful Bill Act, increased corporate profits, and capital inflows from foreign investors.

From a technical viewpoint, the daily chart of the S&P 500 indicates a continued upward movement, with bulls currently in control. A breakout above the local high near the 6,900 level will allow for an increase in previously established long positions. Target levels for buyers are set at 6,990 and 7,100.

The material has been provided by InstaForex Company - www.instaforex.com