Will this year's U.S. stock market "Christmas rally" arrive as scheduled?

With mild inflation data supporting the Federal Reserve's policy path, the U.S. stock market is gaining momentum after recent fluctuations, as investors hope that the historic "Christmas rally" will conclude 2025 on a high note.

Boosted by Thursday's inflation report, the S&P 500 index rose 0.8%, breaking a four-day decline. Previously, due to stricter scrutiny of AI infrastructure spending and adjustments to expectations for the Fed's interest rate cuts in 2026, the U.S. stock market started December weakly, causing concern among investors who were hopeful for the traditional year-end rally.

However, the latest economic data alleviated market worries about a rebound in inflation, leading to a rebound in sectors led by technology stocks, with derivatives market trading showing that investors are increasing their holdings in AI and semiconductor assets. Angelo Kourkafas, Senior Global Investment Strategist at Edward Jones, noted:

"This week's economic data further solidified expectations that the Fed will maintain a tendency to cut rates. While investors may lock in profits in the coming days, leading to some selling pressure, the latest data 'likely turned on the green light for the start of this year's Christmas rally.'"

At the same time, fund flows and historical data also provide psychological support for bulls. According to Goldman Sachs, over the past nine weeks, $100 billion has flowed into U.S. stocks, with positive sentiment among retail and institutional investors, and volatility has dropped to its lowest level of the year. Data compiled by Citadel Securities shows that since 1928, the S&P 500 index has recorded gains in 75% of the last two weeks of December, with an average increase of 1.3%.

In Goldman Sachs' view, unless a significant shock occurs, the market is unlikely to resist these overwhelming positive seasonal factors, and there is still upward potential for the year-end rally.

Delayed Data Dispels Policy Fog

This week, investors digested a batch of economic data that had been delayed due to a 43-day federal government shutdown.

The consumer price index (CPI) increase released on Thursday was below expectations, greatly boosting market sentiment. In terms of non-farm employment data, although November's non-farm employment growth rebounded, the unemployment rate rose to 4.6%, the highest level in over four years.

Trevor Slaven, Head of Global Asset Allocation at Barings, stated that considering the data distortions caused by the government shutdown, a major question facing the market next week will be the Federal Reserve's future policy path.

Currently, the Federal Reserve has cut rates in three consecutive meetings, and investors are trying to find clues from the data about when the central bank might loosen policy again in 2026. As the year-end approaches, economic data reports remain dense, including third-quarter GDP, durable goods orders, and consumer confidence index data, which will be released in succession

Technology Stocks: From Doubt to Buying on Dips

Despite the S&P 500 index rising over 15% in 2025 and being on track to achieve at least a 10% increase for the third consecutive year, the technology sector, which holds a significant weight, has not been smooth sailing recently.

This week, questions surrounding Oracle's data center project temporarily weighed on technology stocks and other AI-related stocks. Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, pointed out that the market has begun to more clearly doubt the return cycle of AI spending, and the high proportion of technology stocks in market capitalization-weighted indices has intensified market pressure.

However, investor confidence has not collapsed as a result. Following the data release on Thursday, technology stocks quickly rebounded, with Bloomberg's seven major technology stock indices rising by 2% and the Nasdaq 100 index increasing by 1.5%.

Trading activity in the derivatives market shows that traders have not fled but instead increased their exposure to AI, semiconductors, and long-term technology assets by taking advantage of the pullback in technology stocks. Data from Susquehanna International Group indicates:

Traders have been buying a large number of call spread options related to Nvidia, Micron Technology, and technology sector ETFs, while selling put options on tech giants like Google's parent company Alphabet, Nvidia, and Broadcom.

Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna, believes that this is a typical display of confidence, indicating that investors believe the decline will be shallow and temporary. Investors are using the pullback in technology stocks to increase their exposure to AI, semiconductors, and long-term tech stocks rather than fleeing.

Capital Flows and Market Sentiment Remain Positive

In addition to the rebound in technology stocks, the broader market backdrop also remains constructive.

Goldman Sachs data shows that over the past nine weeks, investors have poured approximately $100 billion into U.S. stocks, continuing the steady inflow trend for the entirety of 2025. The investor sentiment indicator tracked by the firm is currently at its most optimistic level since April.

Retail investors continue to be the most steadfast supporters of U.S. stocks. Data from Castle Securities indicates that individual traders have been net buyers of bullish options on U.S. stocks for 32 out of the past 33 weeks.

Scott Rubner, Head of Equity and Equity Derivatives Strategy at Castle Securities, wrote in a report that after a year of substantial portfolio returns and record household wealth, retail participants enter 2026 with both confidence and the balance sheet capacity to increase market participation.

Institutional investors are also showing a positive stance, not only buying options but also directing funds into sectors outside of large technology stocks in recent weeks. Data shows that economically sensitive real estate and industrial stocks have shown the strongest buy signals for the second consecutive week.

Additionally, as the seasonal quiet period approaches, volatility is subsiding. The 10-day realized volatility of the S&P 500 index has fallen to one of the lowest levels of the year, and Goldman Sachs' trading department points out that low levels of implied volatility mean that systemic re-leveraging will gain more momentum, adding another tailwind to the year-end market.