Good morning investors,
The Santa Claus rally setup couldn't be clearer as we enter the final seven trading sessions of 2025 with all three major indexes within 3% of record highs. Oracle surged 7% Friday on leading the TikTok US buyout while Nvidia climbed on reports Trump may approve H200 chip sales to China.
Consumer sentiment improved modestly in December but remains 28.5% below last year, perfectly capturing the K-shaped economy where affluent households drive over half of spending while a quarter live paycheck to paycheck. Gold hits fresh records at $4,443 while silver doubles for the year, signaling monetary debasement concerns persist.
Opening Bell: Tech Rebounds
S&P 500 ($SPY ( ▲ 0.72% )) and Nasdaq ($QQQ ( ▲ 0.89% )) futures up 0.4% and 0.6% respectively with Dow ($DIA ( ▲ 0.47% )) futures gaining 20 points. Nvidia ($NVDA ( ▲ 1.02% )) rises over 1% premarket while Micron ($MU ( ▲ 2.59% )) jumps 3% and Oracle ($ORCL ( ▼ 5.4% )) gains 2% as AI names attempt recovery from recent weakness. The rotation from tech to value pauses as year-end positioning takes precedence.
Markets close early Wednesday at 1 PM ET for Christmas Eve and remain closed Thursday. International markets also closed Friday, creating thin holiday trading conditions perfect for exaggerated moves.
Santa Claus Rally Watch
The seven day Santa Claus rally period begins Tuesday's open, covering the last five trading days of 2025 and first two of 2026. Since 1950, the S&P 500 averaged 1.3% gains during this window with positive returns 75% of the time. Current setup looks favorable with improving breadth and oversold tech names bouncing.
Equal-weighted S&P, small caps, and Dow transports all approaching new highs validates broadening participation beyond mega cap tech. This healthy rotation suggests sustainable advance rather than narrow speculation ending.
Oracle's Redemption Arc
My call last week that Oracle's 42% decline from September highs looked overdone was timed perfectly as the shares surged on TikTok leadership. Yes, funding concerns remain real with Blue Owl declining Michigan data center backing, but the selloff reflected peak AI pessimism rather than fundamental breakdown.
I initiate a $230 price target with upside potential as sentiment shifts from extreme negativity. Oracle's high OpenAI exposure created vulnerability during circular financing fears, but the TikTok win validates strategic positioning. Not every AI deal needs identical partners and progress certainly won't be linear.
Consumer Confidence Divergence
Michigan sentiment at 52.9 improved from November but sits 28.5% below last December, highlighting the K-shaped recovery's persistence. Housing sales ticked up three straight months yet 2025 heads for a 25 year low in total sales. The affluent thrive while lower income households struggle with rent, delinquencies, and job uncertainty.
Tuesday's Conference Board confidence data becomes crucial for reading consumer health heading into 2026. With upper-third income households driving over half of spending, aggregate numbers mask underlying fragility.
Inflation's Goldilocks Print
November's 2.7% CPI versus 3.1% expected created perfect backdrop for rally continuation. Despite data collection issues from the shutdown, markets interpret any excuse optimistically. Growth projections rising while inflation potentially moderates creates the Goldilocks scenario bulls crave.
The combination of lukewarm labor data, surprise inflation drop, and notionally dovish Fed provides equity support even as valuations concern legitimate investors. Most Wall Street strategists remain positive on 2026 despite justified valuation fears.
Precious Metals Message
Gold hitting $4,443 and silver doubling for 2025 sends clear message about monetary debasement fears. Outsized fiscal deficits across US, Europe, Japan, and China restore gold's monetary value proposition after years of suppression relative to nominal assets.
The precious metals complex following gold higher with leverage suggests this isn't temporary risk-off but structural repricing of fiat currency credibility. Central banks buying gold at record pace validates the theme.
2026 Preview
I expect the optimism phase continuing into 2026 but with significant choppiness including another large drawdown similar to 2025. Midterm election years typically deliver volatility before year end clarity drives positive returns. The political division globally suggests heightened uncertainty.
The constant back and forth on policy, state level gerrymandering battles, and deepening political divisions create volatility backdrop. Yet underlying earnings growth and economic resilience should ultimately prevail once election uncertainty clears.
Final Thought
We stand at year end with markets demonstrating remarkable resilience despite legitimate concerns. The S&P hovering within 3% of highs while rotating beneath the surface shows healthy consolidation, not distribution. Breadth improvement over the past two weeks with new highs approaching for equal-weight indexes validates the advance.
The Santa Claus rally setup looks compelling with oversold tech bouncing, breadth improving, sentiment recovering from pessimism, and historical patterns strongly favorable. My conviction remains that we push toward 7,000 as year-end dynamics overwhelm analytical caution.
The K-shaped economy persists but markets focus on the affluent half driving spending. Until lower income stress infects upper income confidence, equity markets can continue climbing walls of worry. Gold's message about monetary credibility matters long-term but doesn't prevent near term equity gains.
This week's thin holiday trading favors upside surprises as light volume enables easier markup. The optimism phase continues but choppiness increases.
The grind higher continues despite valid concerns because that's what bull markets do, they climb walls of worry until euphoria finally appears. We're nowhere near that point yet.
As always, feel free to reach out with questions about year-end positioning.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.