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What you need to know
- Stocks fell on Thursday, dampening investors' hope for a Santa Claus rally to start 2025.
- The S&P 500's average return in years without a Santa Claus rally is less than half its return in years with one (5% vs. 10.4%).
- Analysts are generally optimistic about the outlook for stocks this year, although there's uncertainty about some of the policies incoming President Donald Trump will implement, amplifying the risk of volatility.
Santa Claus may not visit Wall Street after all this year.
The S&P 500 fell 0.2% on Thursday and has lost ground in five straight sessions, giving investors little hope of getting a Santa Claus rally, which is the tendency for stocks to rise during the last five sessions of a year and the first two of the new year. To get the index back in positive territory, it would need to increase by 1.8% Friday.
It is true that 2024, even with no end-of year boost, was a great year for the stock market. The S&P 500 rose more than 20% for a second straight year, its first such stretch this millennium.
Santa Claus rallies are more than just the cherry on top; they can also be viewed as a sign of good fortune. Santa Claus rallies are historically linked to the performance of stocks in January and for the full year.
Since 1950, the S&P 500 has, on average, returned 1.4% in January and 10.4% in the calendar year after a Santa Claus rally, according to a recent analysis by LPL Financial. (The S&P 500 was launched in 1957; stock performance before this year is based on its predecessor index, the S&P 90.) When there is no Santa Claus rally in the calendar year, January returns are slightly negative. Full-year returns have averaged 5%.
What is the outlook for stocks in 2025?
Although the chances of Santa Claus’ rallying appeared low on Thursday, experts in the stock market remain confident about prospects for 2025.
Donald Trump will likely support the stock market, since he is promising to extend corporate tax breaks from his previous term and to cut regulations. It is expected that corporate profits will be supported by the U.S.’s strong economy, and experts expect them to grow after two years with a narrow leader. The Magnificent Seven stocks are still expected to grow profit faster than the average S&P 500 company, but by the slimmest margin in seven years, according to Goldman Sachs analysts.
This year, the artificial intelligence (AI), craze will also evolve as AI is used more widely. A small number of companies—most of them semiconductor and networking hardware companies like Nvidia (NVDA) and Broadcom (AVGO)—have thus far benefited from the AI revolution. In 2025, experts believe that a wider range of businesses will start to benefit from AI as more infrastructure is brought online and new applications are found for it.
Trump 2.0 could increase uncertainty
Donald Trump has a reputation for using the performance of the stock exchange as an indicator for his success in office. But his impending presidency is a significant source of uncertainty that could cause turbulence this year.
If implemented, many of Trump’s policy proposals could cause a drag on the stock market. Trump’s proposed tariffs may help to fuel inflation, by disrupting supply chains around the world and increasing costs for business. Trump’s promise of mass deportations will likely increase inflation.
A resurgent inflation may force Federal Reserve officials keep rates of interest at levels they consider appropriate. “restrictive,” This would put additional pressure on the businesses and stifle demand from consumers. A higher interest rate would also likely lead to a rise in bond yields, and an increase in the dollar. Both of these factors would put pressure on more risky assets such as stocks.
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