US stocks are just a step away from historical highs: Will the Christmas rally ignite the battle for the year-end in 2025?

As the last week of 2025 approaches, the three major U.S. stock indices are all within 3% of their respective ATH as of the market close on December 20, 2025, setting the stage for the highly anticipated “Christmas rally” at year-end. However, beneath the seemingly calm market surface, undercurrents are stirring: the Consumer Confidence Index has plummeted 28.5% compared to the same period last year, revealing the divergence of different income groups under the “K-shaped economy”; meanwhile, the unexpected slowdown in inflation data to 2.7% in November has opened the door for the Fed to continue cutting interest rates in 2026. The last-minute movements of tech giants have become a key variable in determining whether the market can set new highs at year-end.

The Market Awaits Santa Claus: Historical Patterns and Current Layout

Wall Street traders have been waiting all year for a special seasonal window - the “Christmas rally.” This widely observed market phenomenon refers to the strong upward momentum that the stock market often displays during the last five trading days of the year and the first two trading days of the following year. Historically, this window period of seven trading days is one of the highest return periods of the entire year. With only seven trading days left in 2025, the market is on the verge of this magical moment, and all eyes are focused on whether history will repeat itself.

The current market position provides an excellent launchpad for the Christmas rally. As of last weekend, the Nasdaq Composite Index, dominated by tech stocks, has risen about 0.4% year-to-date, while the Dow Jones Industrial Average has fallen by 0.7%, and the S&P 500 Index has remained largely flat. Despite the mixed performance, all three major indices are hovering near their historical peaks, and this state of “high-level consolidation” means that any positive catalyst could be amplified. Capital analyst Kyle Roda noted in a report to clients: “Lackluster labor market data, unexpectedly declining U.S. inflation data, and a nominally dovish Fed are all supporting stock prices.” It seems all the market conditions are in place, just waiting for the starting gun.

However, not all investors are unreservedly optimistic. Rhoda added in the same report: “Although the Fed has almost given the green light for the Christmas rally, reasonable concerns about valuations are pulling the market's handbrake, preventing it from racing toward record highs.” This cautious sentiment is reflected in the narrow fluctuations of the market. As the Christmas holiday approaches, trading volume typically shrinks, and institutional investors have mostly entered “vacation mode,” which means that the movements of the few funds that remain can have a disproportionate impact on the index, further exacerbating the uncertainty of short-term trends.

A True Reflection of the K-shaped Economy: Divergence Between Consumer Confidence and Market Sentiment

When the market index approaches its glorious peak, the feelings of the average American consumer seem to be in another world. The latest data shows that the University of Michigan Consumer Confidence Index for December has slightly rebounded to 52.9 from November, but compared to December 2024, it has plummeted by 28.5%. Survey director Xu Hsien-shu bluntly stated: “Consumers have loudly and clearly indicated that they believe the economic outlook has significantly worsened since the beginning of the year.” This sentiment sharply contrasts with the strong performance of the stock market, forming a clear “K-shaped” divergence.

This “K-shaped economy” has become the defining narrative of 2025. Jeffrey Roach, chief economist at LPL Financial, explained: “The 'K-shaped' economy creates a divided consumer base. The affluent are doing well, even thriving, while low-income families are struggling with high rents, rising debt defaults, and job uncertainty.” Data from Bank of America confirms this division: although consumer spending has remained relatively stable in the second half of this year, the top third of households contributed more than half of it; meanwhile, about a quarter of households are still living paycheck to paycheck. This fundamental backdrop determines that the driving force behind the market's rise is not a broadly shared prosperity.

The cold data from the real estate market adds a footnote to this divided picture. In November, existing home sales saw a slight rebound for the third consecutive month, but the total sales for the year 2025 are likely to hit a new low in 25 years. High mortgage rates and home prices have kept many middle-class and below families out of the market. Consumer perception of inflation also shows a “K-shaped” characteristic. Comerica Bank's chief economist Bill Adams pointed out: “Even if overall inflation data is optimistic, consumers' feelings about inflation may still be 'saltier', as the prices of many necessities (excluding housing) are still rising rapidly.” This means that despite improvements in macro data, the pressure on people's livelihoods is easing slowly, and the emotional foundation supporting market valuations is not as solid as the indices suggest.

Inflation Cooling and Fed's Dovish Tone: The Market's Strongest “Christmas Gift”

For the stock market, perhaps there is no better Christmas gift than an unexpected “cooling of inflation.” In November, the Consumer Price Index (CPI) rose by 2.7% year-on-year, significantly lower than market expectations, providing substantial relief from nearly a year of inflation anxiety. This report is widely interpreted by the market as a key signal that the Fed can confidently continue its easing path in 2026 after cumulatively cutting rates by 75 basis points in 2025. Adams commented, “This report strengthens the case for further rate cuts in 2026.”

The importance of this inflation report lies in its timing and content. At a time when market liquidity is weakening and direction is unclear at the end of the year, it provides a clear and strong narrative support: the balance of monetary policy will tilt further towards growth. A lower interest rate environment theoretically reduces the discount rate for stocks, thereby increasing their present value, which is particularly favorable for technology growth stocks that rely on future cash flows for valuation. This also explains why, despite mixed overall economic data, market valuations can still be maintained near historical highs—investors are pricing in future easing policies in advance.

However, the Fed's “green light” is not without reservations. The market's “handbrake” stems precisely from doubts about whether current valuations fully reflect this optimistic expectation. Especially after technology stocks related to artificial intelligence have experienced years of skyrocketing growth and have become the “pillars” of many investment portfolios, any fluctuations in performance could trigger a chain reaction. Therefore, although the macro policy direction is favorable, the fundamentals at the individual stock and sector level, especially the upcoming Q1 2026 earnings season guidance, will be the determining factors for whether the market can extend from the “Christmas week” into “New Year January.”

Tech Giants Step Up: The Final Engine Leading the Market to Breakthrough

Outside of the macroeconomic narrative, the specific direction of the market at the end of the year is often shaped by the performance of a few key giants. In the final trading days of 2025, the technology sector once again demonstrated its market influence. Oracle's stock price surged over 7% on December 20, as it was confirmed as the lead buyer of the American consortium acquiring TikTok from China's ByteDance. This news temporarily dispelled market concerns regarding its commitment to an artificial intelligence strategy, as the stock had fallen nearly 40% since its peak in September.

At the same time, another piece of news also boosted the sentiment in the technology sector. According to reports, the Trump administration is reviewing NVIDIA's plans to sell its second most powerful H200 artificial intelligence chip to Chinese buyers. This news eased market concerns about further geopolitical tightening, driving NVIDIA's stock price up. Previously, Micron Technology's strong earnings report and its stock price rebounding over 10% had already stabilized the market's confidence in the sustainability of demand for artificial intelligence hardware to a certain extent. The collective strength of these giants not only steadied the NASDAQ index but also sent a signal to the market: despite high valuations, the core growth narrative of the technology sector—the capital expenditure cycle of artificial intelligence—has not been broken.

The dynamics of these stocks also indicate the market style for 2026. Goldman Sachs analysts wrote in a client report: “2025 is a great example of the 'early optimistic phase' of the macroeconomic cycle, where many stock markets… valuations rise along with earnings. We believe this optimistic phase will continue into 2026.” This suggests that the market's support may be shifting from mere liquidity expectations and the pull of a few leading stocks to broader economic growth and improvements in corporate earnings. If the dominant wealthy class and corporate earnings in a “K-shaped economy” can be sustained, then even if overall consumer confidence is weak, the stock market may still find an upward path.

Outlook 2026: From Holiday Optimism to Challenges of Sustained Growth

As the Christmas bells are about to ring, the trading of 2025 will also come to an end. The market stands at the threshold of an ATH, holding good cards such as cooling inflation, a dovish Fed, and a rebound in tech giants. The traditional “Christmas rally” is statistically and historically leaning towards the bulls. However, the joy of the holidays is ultimately fleeting, and whether the market can transform this seasonal optimism into a sustained, profit-driven bull market in 2026 will face a real test.

Year-end closing week core economic data preview ###

• Consumer Confidence (December 23): Expected 92.0, Previous 88.7. This is a key window for observing public sentiment under the “K-shaped” economy.
• Personal Consumption Expenditures (PCE) Price Index (Q3): Core PCE QoQ expected +2.9%. This is the Fed's preferred inflation indicator, which will confirm the trend of CPI retreat.
• Initial jobless claims (week ending December 24): expected 223,000. Any unexpected weakness in the labor market may strengthen rate cut expectations, but if it is too weak, it could raise concerns about a recession.

The real challenge lies in the winding down of the “K-shaped” economy. If inflation relief ultimately benefits a broader range of income groups, and if the housing market gradually thaws with declining interest rates, then there may be a possibility to bridge the significant gap in consumer confidence, and the foundation for market gains will expand from a few sectors and classes to more solid economic fundamentals. Conversely, if the divergence continues to worsen, the currently high market valuations will be like castles built on quicksand. For investors, while enjoying the potential “Christmas gift,” it may be more important to focus on companies that can continue to thrive amid economic divergence, as well as sectors whose valuations have not yet fully reflected growth potential in 2026. After all, the holiday will end, but investing is a long journey that spans all four seasons.