The S&P 500 is positioning for a potential Christmas rally. Rising US Treasury yields and a downturn in cryptocurrency markets have affected demand. Despite a recent five-day rally setback, the index maintains a positive outlook. JP Morgan predicts the S&P 500 will reach 7,500, while RBC Capital Markets sees it at 7,750 by 2026, driven by US economic strength, corporate earnings, and technological advancements.<\/p>\n
Seasonal trends could benefit the S&P 500 at the year’s end, with data since 1990 showing December as a growth period. Average returns in December rank second, and volatility is the second lowest. However, the growth rate has been decelerating over time. Market expectations for a Christmas rally and a potential rate cut complicate stalling bullish sentiments.<\/p>\n
The Fed is projected to ease monetary policy once in 2025 and twice in 2026, primarily due to changes within the FOMC. While the economy currently supports the S&P 500, tariffs are impacting GDP, evidenced by ongoing declines in manufacturing activity. Nonetheless, investments in artificial intelligence are sustaining the economy, underpinning the S&P 500.<\/p>\n
Concerns about an AI bubble led to a stock pullback in November. As fears eased, stocks rebounded sharply, bolstered by technology sector news, including NVIDIA’s $2 billion chip development investment.<\/p>\n
Given the S&P 500’s recent pullback after a five-day rally, we see a potential entry point for a year-end push. The market’s outlook remains bullish, supported by a strong US economy and expectations of a “Christmas rally.” This temporary cooling, driven by rising Treasury yields, could be the short-term dip traders were waiting for.<\/p>\n
Seasonality is a powerful tailwind for us right now. Historically, the S&P 500 has risen in December more than 70% of the time since 1950, making it one of the strongest months of the year. With implied volatility also tending to be lower in December, buying options can be relatively cheaper than in other periods.<\/p>\n
The market is heavily anticipating the Federal Reserve to begin easing its monetary policy. CME FedWatch Tool data shows markets are pricing in a high probability of at least one rate cut by the middle of next year, followed by more in 2026. This forward-looking stance is making it difficult for sellers to gain any lasting traction.<\/p>\n
Investment in artificial intelligence is a key theme keeping the economy and the S&P 500 afloat, even as tariffs pressure manufacturing. We’ve seen how news from the tech sector, which now makes up over 30% of the index, can quickly reignite bullish momentum. This makes derivatives on tech-heavy indices like the Nasdaq 100 or specific AI-related stocks particularly interesting.<\/p>\n
For the coming weeks, we believe buying call options with late December 2025 or January 2026 expirations on the S&P 500 is a direct way to position for the rally. Using bull call spreads could be a more cost-effective strategy to capture this expected upward move. These trades align with both the seasonal trend and the positive long-term forecasts.<\/p>\n
However, we must keep an eye on risks like the ongoing slump in industrial production, which we saw reflected in the recent ISM Manufacturing PMI report that has struggled to stay out of contraction territory. A sharp, unexpected spike in bond yields could also disrupt the rally. This suggests keeping trade sizes measured or using spreads to define risk.<\/p>\n
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