Santa Rally at Risk: Wall Street Warns December Could Disappoint

TLDR

• Market experts warn December 2025 may not deliver the typical Santa Claus rally that usually lifts stocks
• 2025 has seen unusual volatility including the DeepSeek crash and Trump’s tariff announcements disrupting normal patterns
• Investors are purchasing downside protection in the options market rather than betting on seasonal strength
• Federal Reserve rate cut probability has jumped to 83% for December from 30% just one week ago
• Third quarter S&P 500 earnings grew 13.4% marking four consecutive quarters of double-digit profit growth

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December typically delivers strong gains for stock market investors. The Santa Claus rally, where stocks climb after Thanksgiving, has been a Wall Street staple for years. Market strategists now say 2025 could break that pattern.

Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, told Yahoo Finance that months in 2025 have not followed their usual seasonal behavior. The year has been anything but typical for investors.

Market volatility has defined 2025. The DeepSeek meltdown shocked investors in February. President Trump’s unexpected tariff announcement in April added more uncertainty.

These events drove stocks to record highs before volatility returned in recent weeks. Concerns about AI stock valuations have persisted throughout the year. The traditional December playbook may not work this time.

Bearish Signals in Options Trading

The options market is flashing warning signs. Investors are buying more downside protection instead of positioning for seasonal gains. Silverman expects another “volatility pothole” could hit markets.

Omar Aguilar serves as CEO and chief investment officer at Schwab Asset Management. He sees risks building beneath the surface. Economic data has arrived unevenly following the government shutdown.

Sector leadership is beginning to rotate. The momentum trade shows early signs of unwinding. Megacap technology stocks have swung wildly in recent weeks.

These tech giants have driven both rallies and selloffs. “The opportunities for a catalyst that will propel the market up don’t seem to be that strong this time,” Aguilar told Yahoo Finance on Monday.

Fed Rate Cut Expectations Surge

Federal Reserve policy remains a key focus for investors. Rate cut expectations have shifted dramatically in a short period. Markets now assign an 83% probability to a December rate cut.

That figure stood at only 30% one week earlier, according to the CME FedWatch Tool. Stocks have moved in tandem with changing Fed outlook. Aguilar said doubled rate-cut expectations could provide support for stocks.

The outcome remains uncertain. The bigger long-term factor will be returns from AI investments. How quickly those gains show up in the economy matters more over time.

Despite near-term uncertainty, many strategists maintain bullish long-term targets. Some see the S&P 500 reaching 8,000 over the next 12 to 18 months. Strong corporate earnings support this optimistic view.

Corporate Profits Remain Strong

S&P 500 companies reported 13.4% profit growth in the third quarter, FactSet data shows. Big Tech companies led the expansion. This represents the fourth straight quarter of double-digit earnings gains.

E-Mini S&P 500 Dec 25 (ES=F)

The growth rate topped the 10-year average of 9.5%. It fell below the five-year average of 14.9%. These results keep the long-term bull case alive.

The near-term path looks bumpier. Investors face increased volatility heading into December. Aguilar offered straightforward advice for navigating current conditions.

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