The US stock market is only 3% away from its historical high! Can the Santa Claus rally create a new high?

As the US stock market enters the last seven trading days of 2025, the three major indices are all within 3% of their historical highs. Last week, the tech-heavy Nasdaq Composite Index rose by about 0.4%, while the blue-chip Dow Jones Industrial Average fell by about 0.7%, and the S&P 500 Index closed with little change. Market focus has shifted to the “Santa Claus rally,” which encompasses the last five trading days of the year and the first two trading days of the next year, historically one of the best week trading windows.

The Historical Patterns of Santa Claus Market and This Year's Variables

(Source: Yahoo Finance)

Traders have been waiting all year for the “Santa Claus rally,” which encompasses the last five trading days of the year and the first two trading days of the next year, historically one of the best weekly trading windows for market performance. Capital analyst Kyle Rodda wrote in a note to clients: “The lackluster U.S. labor market data, the unexpected decline in U.S. inflation numbers, and the nominally dovish Federal Reserve all provide support for stock prices. Although the Federal Reserve has almost approved the Santa Claus rally, reasonable concerns about valuations have still left the market in a handbrake and hindered it from reaching historical highs.”

Last Friday (December 19), the US stock market showed signs that were in line with historical expectations, with large tech stocks performing particularly well. Oracle's stock price had fallen nearly 40% since its September peak due to concerns about its AI commitments, but on Friday, after news broke that the company became a major buyer group for acquiring TikTok from ByteDance, its stock price rose over 7%. This single-day surge indicates that major merger and acquisition news can still trigger significant volatility in a low liquidity environment at the end of the year.

Nvidia's stock price also rose on Friday, with Reuters reporting that the Trump administration is reviewing the chip giant's plans to sell its second most powerful H200 chip to Chinese buyers. This news of regulatory scrutiny instead boosted the stock price, indicating that the market interprets it as a positive for protecting Nvidia's technological leadership. Micron's earnings report this week, along with the stock's subsequent rise of over 10%, has also eased investors' concerns about AI and the overall market situation.

Three Major Supports for the Year-End Surge of US Stocks

Large Tech Stocks Recover: Oracle surges 7%, Nvidia benefits from favorable regulations, Micron's earnings report exceeds expectations, AI themes reignited.

Inflation Data Positive: November CPI fell to 2.7%. Although there are concerns about distortion, it still strengthens expectations for interest rate cuts in 2026.

Santa Claus Rally Tradition: Historical data shows that the last seven-day trading window performs best, and investors expect this pattern to continue.

The US market will open for a half day on Wednesday and will be closed on Thursday for Christmas. Many international markets will also continue to be closed on Friday. This shortened trading time means that liquidity will further dry up, and price volatility may be amplified. Small orders can drive significant price fluctuations, which presents both opportunities and risks.

The Split of the K-shaped Economy and the Contradiction of Consumer Confidence

One of the most representative narratives of 2025 focuses on the K-shaped economy that has emerged among American consumers. LPL Financial Chief Economist Jeffrey Roach stated, “The 'K-shaped' economy is splitting consumers. The affluent are doing relatively well, but the living conditions are poor, while low-income households are facing high rents, rising delinquency rates, and job uncertainty.”

According to data from the American Bank, although consumer spending remained relatively stable in the second half of the year, the top third of American households accounted for more than half of the spending; about a quarter of households live paycheck to paycheck. This divergence is clearly presented in consumer confidence data. Although the data released by the University of Michigan on Friday showed a slight rebound in consumer confidence for December compared to November, the index stands at 52.9, which is 28.5% lower than December last year.

The director of the University of Michigan's consumer survey, Joanne Xu, stated: “Consumers have clearly indicated that the economic outlook has deteriorated significantly since the beginning of the year.” This pessimistic sentiment stands in stark contrast to the stock market, which is approaching historical highs. The stock market is dominated by the wealthy class and institutional investors, whose wealth mainly comes from asset appreciation rather than wage income. For the one-quarter of households that live on salaries, the stock market's new highs have nothing to do with their lives.

Home sales in November rose slightly for the third consecutive month, but according to the National Association of Realtors, sales in 2025 are likely to end at the lowest point in 25 years. This weakness in the housing market further validates the K-shaped economic divergence: the wealthy are making money through the stock market, while the poor can’t even afford a house.

Bill Adams, chief economist at Comerica Bank, stated that the CPI data should give the Federal Reserve confidence in cutting rates again next year. “The Federal Reserve will be pleased to see the overall Consumer Price Index and Core Consumer Price Index slow down, as the report strengthens the case for more rate cuts in 2026.” Nevertheless, he said, “Consumers' perceptions of inflation may still be more dissatisfied than the optimistic news headlines, as prices for many non-essential goods continue to rise rapidly.”

2026 Outlook and Valuation Concerns Tug-of-War

Despite valuation concerns at the end of the year, most Wall Street strategists maintain a positive outlook for the market next year. Goldman Sachs analysts wrote in a client note: “2025 is a good example of the early optimistic phase of the macroeconomic cycle, with many stock markets rising along with earnings increases and valuations. We believe the optimistic phase will continue into 2026.”

This optimistic expectation is based on earnings growth. If a company's earnings continue to grow, even if the valuation multiples remain unchanged, the stock prices will rise accordingly. The earnings growth of AI-related companies is particularly strong, which is why tech stocks can still be favored even at high valuations. However, Rodda also warns: “Concerns about reasonable valuations still keep the market in a handbrake and hinder the market from reaching new historical highs.”

The current P/E ratio of the S&P 500 is about 22 times, well above the historical average of 16-18 times. This high valuation means that any negative news could trigger a sharp pullback. The Trump administration's tariff policy, geopolitical risks (Venezuela blockade, Russia-Ukraine negotiations), and the uncertainty of the Federal Reserve's policy path are all potential black swans.

This week's economic data is relatively sparse. The Consumer Confidence Index from the Conference Board, which is expected to be 92.0 compared to the previous 88.7, will be the focus on Tuesday. Personal consumption and core PCE index for the third quarter will also be released on Tuesday. Initial jobless claims will be published on Wednesday. The market will be closed on Thursday for Christmas. This sparse data calendar means that the market is driven more by sentiment and capital flows rather than fundamental data.

As the US stock market enters the final phase of 2025, it presents a subtle state of “close but not broken through.” The historical pattern of the Santa Claus rally supports a year-end rebound, but high valuations and K-shaped economic divergence pose potential risks. For investors, if the Santa Claus rally does occur, it may be an opportunity to take profits; if it does not happen, caution is needed for the potential deep correction at the beginning of the year.