The S&P 500 is gearing up for a Christmas rally

Rising US Treasury yields and renewed selling of cryptocurrencies have cooled demand in the S&P 500. The broad stock index took a step back after a five-day rally, but its outlook remains bullish. JP Morgan sees it rising to 7’500, while RBC Capital Markets forecasts growth to 7’750 by the end of 2026, driven by the strength of the US economy, corporate earnings, artificial intelligence, and further easing of the Fed’s monetary policy.

At the end of the year, seasonal factors could play in favour of the S&P 500. According to CFRA research, since 1990, the market has most often grown in December, while average returns have been second, and volatility has been the second lowest. After Thanksgiving, it tends to grow. That’s the good news. The bad news is that the scale of this growth is decelerating over time.

When the market is preparing for the Christmas rally and expecting a cut in the federal funds rate, it is difficult to stop the bulls. According to Bank of America, the Fed is expected to ease monetary policy once in 2025 and twice more in 2026. This forecast is based on changes in the composition of the FOMC, rather than the state of the US economy. Until now, the health of the economy has been supportive of the S&P 500. The state of the economy allows for lower rates, but does not yet raise fears of a recession.

Tariffs are putting pressure on GDP, as evidenced by the ninth consecutive month of decline in manufacturing activity. However, investments in artificial intelligence are helping to keep the economy afloat and supporting the S&P 500.

Concerns about an AI bubble led to a pullback in stocks in November. However, as soon as fears subsided, they made a sharp recovery, further supported by news from the technology sector. For example, news of NVIDIA’s $2 billion investment in chip development boosted the shares of software manufacturer Synopsys.