This week's market focus: the Federal Reserve's December minutes and the chairman nominate nearby markets to seek policy clues for next year in the “Christmas Market”

The Zhitong Finance App noticed that last Friday was the second trading day of the so-called “Santa Claus Market”. After rising for five consecutive trading days, the stock market closed down slightly. The S&P 500 index and the Dow Jones Industrial Average are still hovering near the record levels set on Christmas Eve.

In this trading week, which was shortened due to the holidays, the benchmark stock indicator, the P500 Index, rose about 2.3% cumulatively, while the blue chip stock Dow and the Nasdaq Composite Index, which mainly focuses on technology stocks, rose by about 1.6% and 2.5%, respectively.

Wall Street has entered another relatively deserted holiday week. Labor market data provider ADP's employment data and the minutes of the December meeting of the Federal Reserve Open Market Committee (FOMC) will both be released on Wednesday. As Wall Street seeks to step high into 2026, these two figures will be the focus of attention.

According to reports, US President Trump will appoint a candidate for the new chairman of the Federal Reserve in the first week of January. Popular candidates for Powell's successors include White House economic adviser Hassett and former Federal Reserve Governor Walsh, as well as Federal Reserve Governor Waller and Bauman. Powell's four-year term as chairman expires in May 2026. This is an uncertain event, and it is likely that the announcement will be delayed.

The “Santa Claus market” is expected to continue

2025 is a year where the entire market continues to reach new highs.

After President Trump introduced the tariff policy in spring, which led to a sharp decline in the market, all three major stock indexes have rebounded and set records many times. Gold and silver prices led to a huge rise in precious metals, both breaking through historic highs as investors turned to safe-haven investments; while copper prices hit new highs due to supply chain disruptions and uncertainty about tariff policies.

In 2025, Nvidia (NVDA.US) also became the first company with a market capitalization exceeding 5 trillion US dollars. Major tech giants are drastically expanding their spending in order not to be left behind in the competition that has now evolved into an “AI arms race.”

Now, as the stock market reached a new high last weekend, the market seems ready for a positive “Santa Claus” — this usually refers to the last five trading days of December and the first two trading days of January.

Adam Turnquist, chief technical strategist at LPL Financial, said: “The momentum towards the end of the year shows that the 'Santa Claus' market is showing a favorable trend — this is usually a bullish sign for January and the year ahead.”

Wall Street strategists predict that major indices will continue this feast in 2026.

The S&P 500 closed at 6929.94 points last Friday. Strategists at J.P. Morgan Chase and HSBC expect the index to reach 7,500 points by the end of 2026. Morgan Stanley and Deutsche Bank are more optimistic, setting targets for 2026 at 7,800 points and 8,000 points respectively. The latter figure represents an increase of more than 15% over current levels.

Dubravko Lacos-Buyas, chief stock strategist at J.P. Morgan Chase, said: “Despite the AI bubble and valuation concerns, we believe that the current high price-earnings ratio accurately predicts super-trending profit growth, AI capital expenditure boom, increased shareholder returns, and more relaxed fiscal policies.”

“Cautiously optimistic”

However, as investors enter 2026, they are also facing a situation where the economic foundation is somewhat shaky.

Despite a jump in GDP growth and a cooling in inflation, the US economy is becoming increasingly fragmented or showing a “K-shaped” trend. High-income households have been the driving force for consumption and wealth growth, while low-income households have been struggling.

Concerns remain about overspending by big tech companies and that the industry may be overvalued and unsustainable. Balance sheet pressure in the private equity and corporate debt sectors continues to accumulate.

Investors must also deal with a range of geopolitical unknowns: the Russian-Ukrainian conflict, tension in the Venezuelan energy market, predictions of oversupply in the global oil market, more isolationist positions by US political leaders, and surging demand for electricity to power the AI revolution.

As of last Friday, traders think the probability that the Fed will keep interest rates unchanged at the January meeting is about 80%, which shows that the market believes that Federal Reserve Chairman Jerome Powell's “walk and see” strategy will continue to dominate interest rate decisions.

Although the strategists at State Street Global Investment Management are generally bullish on the outlook for the US economy in 2026, the agency wrote in a report to clients that they “emphasized the importance of selectively allocating risk exposure” due to factors such as overvaluation and market capitalization size that are still worrying.

This has not stopped strategists from hoping for a strong outlook for 2026. Going back from 75 to 1950, the “Santa Claus Market” has never had negative returns for more than two consecutive years (both 2023 and 2024 did not perform well during this period).

LPL Financial's Turnquist wrote that if this week's Christmas market achieves positive gains, it could indicate a strong start to next year — but history isn't an absolute guarantee.

The key is whether the market can maintain its delicate balance.

Eric Till, chief investment officer of Comerica Wealth Management, wrote in the client report: “The economy is showing a 'golden' scenario, where the US economy is growing higher than potential, inflation is still high but declining, and the stability of the labor market is declining.”

Till said 2026 was characterized by “cautious optimism.”