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The stock market is heading into the Santa Claus Rally, beginning on December 24th and ending on January 5th. According to Citadel Securities, the S&P 500 (SPX) has posted positive returns during this period for around 75% of years since 1928.

Since 2020, 2022 was the only year SPX finished with a negative return of nearly 20%. This was the year when the Federal Reserve started rapidly raising interest rates to curb inflation. Since then, SPX finished both years with solid gains, at 24.23% in 2023 and 23.31% in 2024.

2025 is looking to close at around 17% positive yield. According to Carson Investment Research, the Santa Claus Rally was absent in 2024, as the SPX returned -0.9% in that period. Should the same outcome be expected this time as well?

More importantly, is Q1 2026 looking better than Q1 2025?

Expected Gains and Likelihood of Another Failed the Santa Claus Rally

According to Dow Jones’ historical market data, between the S&P 500 (SPX), Nasdaq Composite (IXIC) and Dow Jones Industrial Average (DJIA), investors should expect to see between 1.3% and 1.65% average gains during the Santa Claus Rally period. That is, if it doesn’t fall into one-third of the time when it fails to materialize just like in 2024.

If 2025 becomes a repeat of 2024, the Santa Claus Rally would fail for two consecutive years. Statistically, this would be a major anomaly given the fact there have never been three consecutive years without one. According to the aforementioned Carson data, only 2015 and 2016 held a two-year consecutive negative streak since 2000.

However, after the 25bps December rate cut, placing the interest rate in the target zone of 3.50%-3.75%, the stock market is in a better position. After all, at the end of 2024, the effective fed funds rate (EFFR) was 4.33% against the current EFFR of 3.64%.

Nonetheless, this is just one of the factors to consider moving forward into the Santa Claus Rally and beyond.

The Increasing Artificiality of the Stock Market

Last Thursday, the Wall Street Journal reported that OpenAI is in talks to raise $100 billion in a funding round, potentially elevating the company’s valuation to $830 billion. This is a tall order for an AI firm that is yet to turn profit, racking up around $5 billion net loss in 2024.

OpenAI expects this year to finish with a nearly double net loss, at around $9 billion. In November’s WSJ projection, based on OpenAI’s financial documents, the company is heading to achieve sustained profitability in 2030. Meanwhile, Amazon-backed Anthropic (Claude family of AI models) is set for profitability in 2028.

According to the latest Dealogic data, the AI hype resulted in the global tech sector issuing $428.3 billion of bonds in 2025, of which the US tech sector is responsible for $341.8 billion. In addition to massive capex inflows toward AI chips and data centers, energy infrastructure also has to be upgraded to feed the growth.

All of this points to unprecedented capital commitments that drive the stock market. After all, the tech portion of the S&P 500 constitutes a substantial 34%, making IT the single largest sector. Nvidia clearly demonstrated this when it became the first ever company to cross the $5 trillion valuation in late October.

Stalling Macro Backdrop

Considering continual reinvesting that data centers require, as newer Nvidia chips supersede older generations, it is likely that much of this capital will never meaningfully settle. Instead, the stock market is entering a self-reinforcing capex flywheel of refinancing and fresh equity issuance.

Although this dynamic has all the hallmarks of a bubble, what will remain is likely an enduring algorithmic layer on top of society, pushed by Oracle, Microsoft, Alphabet, Amazon, OpenAI and Palantir in a symbiotic government-corporate relationship.

That is to say, while the “AI bubble pop” remains elusive, investors should count on the nodes of power to double down to make AI happen. One only has to recall the massive technocratic push during the pandemic narrative.

In the meantime, it appears that tariff turmoil is in the rearview mirror, after causing the market crash in early April. According to Penn Wharton’s Tuesday budget model, President Trump’s tariffs brought in a record windfall of $124.5 billion revenue between January and September 2025.

However, it is yet to be determined if the global tariff realignment will have a positive effect on the U.S. economy, and its stock market. The tariffs’ stated purpose is to re-shore manufacturing in the U.S., following decades-long bipartisan consensus to offshore industries to China. Yet, the U.S. manufacturing has been contracting for nine straight months, as of November’s Manufacturing PMI (Purchasing Managers’ Index).

Moreover, S&P Global reported last Wednesday the smallest rise in new business inflows recorded for 20 months. Likewise, over the last eight months, jobs growth was the second-weakest since September. To top it off, bankruptcies increased 10.6% in the twelve-month period ending September 30, 2025, according to the Administrative Office of the U.S. Courts.

The Bottom Line

Statistically, a second consecutive failure for a Santa Claus Rally would be a major anomaly. Yet, even if the Santa Claus Rally materializes this year, it would likely mask deeper structural weakness beneath the AI-fueled, liquidity-dependent market.

In other words, it is more a signal for an increasingly engineered market rather than a signal of economic optimism.

Nonetheless, investors can likely count on the momentum of Big Tech to force gains through the New Year, as the stock market is now largely driven by self-reinforcing capital commitments in the tech sector.

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