Have you ever watched the market hit a new record high and still felt like something bigger was brewing underneath? That was exactly the vibe yesterday. The S&P 500 closed at another all-time high, small-caps ripped higher, and yet futures opened this morning a touch softer. Classic December behavior – everyone is looking for the next leg, the one that finally confirms the fabled Christmas rally is here.
I’ve been around long enough to know that December often delivers surprises. Sometimes they’re gifts, sometimes coal. This year feels different though – the ingredients are lining up in a way we haven’t seen in a while.
Why Everyone Suddenly Believes in a Year-End Melt-Up
Let’s be honest – the last few weeks have felt like the market was stuck in no-man’s-land. Tech kept carrying everything on its back while the other 493 names in the S&P barely participated. Concentration risk was becoming the phrase of the year. And then, almost overnight, the script flipped.
The Fed didn’t just cut rates on Wednesday – they basically signaled the easing cycle is very much alive. More importantly, they quietly kicked off what traders are calling “QE Lite” yesterday morning: an $8.2 billion Treasury bill purchase, the first of many. That’s real liquidity hitting the system right before the holidays. If that doesn’t scream Santa Claus rally setup, I don’t know what does.
The Great Rotation Is Actually Happening
For months we heard about rotation out of the Magnificent Seven into everything else. Most of the time it was just talk. This week? It’s real. Small-caps are outperforming, cyclicals are on their longest winning streak in years, and value stocks are finally getting some love.
Look at the numbers – the Russell 2000 is now pushing fresh highs while the Nasdaq 100 lags. That’s not noise. That’s the market telling you the rally is broadening. And when the rally broadens in December, history says you usually get follow-through.
- Goldman’s Cyclicals vs Defensives basket is on its longest streak in years
- Small-caps are leading the major indices
- European and Asian markets are hitting records too
- Commodity prices are ripping higher – copper up nearly 3 % overnight
In my experience, when you see this combination – Fed liquidity, sector rotation, global risk-on – it tends to feed on itself. Traders who missed the move pile in, portfolio managers play catch-up before year-end, and suddenly you’re looking at a proper melt-up.
Tech Takes a Breather – And That’s Healthy
Of course, not everything is perfect. The AI trade took a beating this week. First Oracle, now Broadcom – both delivered numbers that were objectively strong but failed to clear the insanely high bar investors had set. Shares down double-digits on “lack of guidance” feels like peak 2024 behavior.
“Investors were seeking more clarity on when and how Broadcom will get a payoff from AI but, instead, they got a vague timetable mixed with some concerns about tightening profit margins.”
Here’s the thing though – a pause in the unstoppable AI freight train might actually be exactly what the broader market needs. The Magnificent Seven had become so dominant that any hint of weakness felt existential. Now? Money is flowing into areas that have been ignored for two years. Energy, financials, industrials, even retail – they’re all waking up.
Think of it like oxygen finally reaching parts of the body that had been neglected. Painful at first, but ultimately healthy.
The Fed’s Not-So-Secret Christmas Present
Let’s talk about the elephant in the room – the Federal Reserve’s balance sheet. After QT for two years, they’re now adding liquidity again. Not huge amounts yet, but directionally it matters. $8 billion here, $8 billion there, pretty soon you’re talking real money flowing into risk assets.
Add in the fact that rate cuts are still very much on the table for 2025 (markets price roughly two full cuts by next December), and you have the perfect cocktail for risk assets. Lower rates + expanding Fed balance sheet + year-end positioning = recipe for upside.
I’ve seen this movie before. 2019 ring any bells? The Fed paused QT, started buying bills, and we got one of the strongest Q4 rallies in years. History doesn’t repeat, but it often rhymes.
Global Markets Are Joining the Party
It’s not just a US story either. Europe’s Stoxx 600 is less than half a percent from its all-time high. Japan’s Topix just hit a fresh record. Even China, which has been the perennial underperformer, is showing signs of life.
When global equities move higher together, especially into year-end, it creates a self-reinforcing loop. European fund managers who underperformed chase US gains. Asian investors rotate into their home markets. US managers who were hiding in the Magnificent Seven suddenly need to diversify or risk looking silly on December 31st.
What Could Possibly Go Wrong?
Look, I’m not here to drink the Kool-Aid blindly. There are always risks. The AI pullback could get uglier if more companies start guiding conservatively. Geopolitical headlines – Venezuela, Ukraine, Middle East – are never far away. And let’s be real: valuations aren’t exactly screaming cheap after two years of gains.
But here’s what I’ve learned over the years: when the market wants to go up into year-end, it usually finds a way. Negative catalysts get ignored. Weak earnings get shrugged off. Bad news becomes “already priced in.”
Right now, the path of least resistance feels higher. Portfolio managers are underweight equities going into year-end – that’s fuel. The Fed is adding liquidity – that’s kindling. Sector rotation is accelerating – that’s wind at the market’s back.
Positioning for the Final Stretch
So where does that leave us with three weeks left in 2025? If you’ve been waiting for the “all clear” signal to add risk, this might be as close as it gets. The Christmas rally everyone has been talking about for months? It doesn’t politely knock on the door. It kicks it down when you least expect it.
Areas that look particularly interesting right now:
- Small-cap and mid-cap indices (finally showing relative strength)
- Cyclical sectors – industrials, materials, financials
- Europe and Japan (cheaper valuations, catching up fast)
- Commodities as an inflation/geopolitical hedge
- Even beaten-up retail stocks heading into the holiday season
Tech isn’t dead – far from it – but the easy money there might be made for now. The next leg of this bull market could very well be led by the parts everyone has ignored for the last two years.
One thing I’ve noticed over the years: the best rallies often feel obvious in hindsight but confusing in real time. Everyone spends months waiting for confirmation, and by the time it arrives, half the move is already gone.
We might just be in one of those moments right now.
The market has spent all year climbing a wall of worry. Maybe, just maybe, it’s finally ready to enjoy the view from the top – at least until January rolls around and reality checks start getting written again.
Until then? Merry Christmas, bulls. Looks like Santa might actually show up this year.
