Will 2025 End With a Santa Claus Rally?

November kept investors on their toes. Early in the month, stocks that had been winning all year suddenly fell behind, while sectors that had lagged started to catch up. Companies tied to artificial intelligence (AI) faced pressure as investors worried about high valuations and how much big tech firms will need to borrow to fund their massive spending plans. At the same time, concerns grew about whether the AI boom is becoming a “circular economy,” where companies mostly sell to each other instead of creating new demand. 

Liquidity stayed fragile throughout the month. When volatility spiked, systematic traders, who use automated rules-based trading models, sold aggressively. Riskier assets were hit hard and weighed on high-priced growth stocks. On the flip side, defensive sectors held strong. Health care led the way, gaining 9% in November, showing that investors preferred stability contrary to the expectation of a “Santa Claus rally.” 

By month’s end, stocks were roughly flat, thanks to a sharp rally in the final week. Heading into December, sentiment looks better. Positive AI headlines, renewed U.S. policy focus on AI through the Genesis Act, and rising odds of a Fed rate cut (now above 90%) have helped calm nerves. Still, investors should watch upcoming economic data closely. 

The bottom line 

Markets remain in a “bad news is good news, good news is bad news” mindset, meaning reactions could be unpredictable as we await the Fed’s move. 

^{Source: Bloomberg} 

Sebastian Teper contributed to this article.