Is it beginning to look a lot like a Santa Claus rally?
Christmas came early for investors as the S&P 500 closed at a record high on Tuesday for the 38th time this year. Sparking holiday cheer was news that the U.S. economy grew at its fastest pace in two years in the third quarter, far ahead of expectations.
It looks like the perfect setup for a Santa rally—the tendency for stocks to drift higher from Christmas Eve into early January.
Without wanting to play Scrooge, investors should remember that markets are as barren as Charlie Brown’s Christmas tree this week—with Tuesday having the lowest trading volumes since Jan. 3, according to Dow Jones Market Data.
Thin volumes
make it harder to gauge market consensus. The strong economic report can be taken at face value, but it could also mean the Federal Reserve is less likely to cut interest rates if the economy is hot.
Low trading volumes can also bring volatility, as relatively little selling may spark outsize moves, so investors should be ready for bumps on any sleigh ride to a year-end rally.
Central bank shifts in Japan have already pushed up Treasury yields this week. U.S.-Venezuela tensions continue and could drive oil prices higher, raising inflation risks and lowering the
likelihood of an imminent Fed rate cut.
In what has become a defining 2025 trend, however, optimism over artificial intelligence may be relied upon to fend off the Grinch: Nvidia stock is up 7.5% over the past five days amid signs that Chinese companies are fueling demand for AI chips.
The best bet for investors during this period may be to not overthink, especially with trading volumes so low. It all gets more serious next week, as the turkey is digested and New Year’s resolutions begin.
—Jack Denton
***The Barron’s Daily will take a break for the holiday and next publish on Monday, Dec. 29.
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A Hot Economy and Cooling Jobs Leave Fed in a Bind
The economy grew at its fastest pace in two years in the third quarter, far exceeding expectations and highlighting the widening gap between strong output and a cooling labor market. For Federal Reserve officials, the data reinforce that while demand is firm, inflation is still running above target.
- Citigroup economists said the upside surprise does little to alter the Fed’s policy outlook, though the divergence between solid growth and weaker hiring could sharpen internal divisions. And risks are mounting for the fourth quarter, according to Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.
- Allen said recent data point to a slowdown in consumer spending, as weaker hiring, stagnant real incomes, and the exhaustion of pandemic-era excess savings begin to weigh on households. Pantheon expects headline growth to slow to around 0.5% to 1% in the final quarter of the year.
- Inflation-adjusted GDP rose 4.3% from July through September versus a year earlier. The report, delayed by the recent government shutdown, far exceeded the 3% growth expected. Growth accelerated from a 3.8% pace in the second quarter and marked the strongest expansion since the third quarter of 2023.
- The strong headline figure was driven by faster consumer spending, stronger exports, higher government outlays, and a smaller drag from investment and imports. Much of that upside, however, reflected unusual trade dynamics tied to President Donald Trump’s tariff renegotiations, which cut imports and boosted exports.
What’s Next: Economists cautioned that the scale and composition of the third quarter’s growth are unlikely to be sustained. Allen said the 1.6 percentage point contribution from net trade was unusually large and is likely to reverse, either through revisions or a drag from inventories in coming quarters.
—Nicole Goodkind and Megan Leonhardt
M&A Soared This Year. Momentum Is Pushing Into 2026.
Mergers and acquisitions made a splash this year, and the momentum can keep going into 2026, driven by combinations of technology and industrial companies. Together those two sectors were the most active in 2025, notching nearly $1.4 trillion in deals out of a total of $4.4 trillion.
- The London Stock Exchange Group says deals are on pace to hit $4.55 trillion for the full year, which would be 30% above last year. Larger deals, rather than the number of deals, is driving the gains. One example is Netflix’s $72 billion offer for Warner Bros.’ studio and streaming assets.
- Looking into 2026, there’s more money out there for deals. Already, two-thirds of the hundreds of corporate and private equity buyers that KPMG surveyed expect a larger deal pipeline in 2026 versus this year. Inflation has dropped, as have interest rates, and there is the possibility for further cuts.
- Private-equity funds have large amounts of cash for deals, sitting around $2.2 trillion today, according to S&P Global. While it’s difficult to know when exactly funds will invest all of that money, they’ll use at least some of it next year because of their investment mandates.
- Tech is a big draw for buyers. Large software companies are hunting for smaller companies to build out
their artificial intelligence and other offerings. In cybersecurity, Palo Alto and CrowdStrike sit at the top of a sector that Wedbush’s Dan Ives believes is ripe for M&A.
What’s Next: Healthcare could also see elevated deal activity. There are currently hundreds of biotechnology companies valued at a few billion dollars or less that could easily fit under the roof of large pharmaceutical companies, which have already been active in acquiring small biotechs.
—Jacob Sonenshine
