(Tuesday market open) With data and earnings sparse, the focus in today's shortened Christmas Eve session is whether Santa Claus will come to town. He only has a few hours to spark a rally, as equities trading ends at 1 p.m. ET and is shut for the holiday tomorrow.
Today's session is often, but not always, the start of the "Santa Claus rally," a period that runs through the second trading day of the new year and historically brings a 1% climb. It's not guaranteed, of course, and some of the usual holiday exuberance might have been pulled forward in the parabolic post-election rise to records. Monday marked the second straight session of recovery after last Wednesday's Fed-induced sell-off, but many names were left out even as semiconductors posted big gains. Stocks rose mildly in overnight trading but so did Treasury yields.
Major indexes approach the holiday down about 1% for the month, with breadth and momentum indicators off sharply from recent peaks. "The selloff on 'Fed day' last week was undoubtedly exacerbated by a frothy investor sentiment backdrop heading into the meeting," said Kevin Gordon, director, senior investment strategist at Schwab. "The upside is that a good amount of froth has been taken out; the downside is that negative inflation surprises are now back as something to watch. Fortunately, though, inflation risk looks different now than it did a couple years ago. Stocks can make it through a sticky inflation environment, but the climb likely won't be smooth."
Three things to watch
Treasuries still a headwind for stocks: One sore point weighing on non-mega caps remains: Treasuries, which took another hit early Tuesday and sent the 10-year note yield back above 4.60%. That's about where it topped last week and the highest since late May. The yield climb came despite what Briefing.com called "stellar demand" for a $69 billion 2-year note auction. Today features a $70 billion 5-year note auction. Falling odds of rate cuts next year amid inflation concerns are a prime factor in the Treasury market's woes, with the CME FedWatch Tool now placing chances of a January rate pause at above 90% and baking in just two rate cuts next year.
Rates shift focus from small caps: Earlier this year, market breadth broadened as interest rates fell, helping the small cap Russell 2000® Index (RUT) reach three-year highs. Lower rates tend to help smaller companies with more sensitivity to borrowing costs, while broader rally participation suggests healthy investor sentiment and supportive technicals. That's changed in recent weeks. The RUT and market breadth both peaked soon after the election. The index is at six-week lows, and until the rate picture changes, a resumption of the broad rally might be difficult. "Rates coming down is an essential ingredient for a continued broadening out," said Liz Ann Sonders, chief investment strategist at Schwab. "This move that we now think is cemented—at least in the near term—of the Fed going from easing policy to pause mode has been one of the contributing factors to this shift back up the cap spectrum to those stocks that don't, all else equal, get hurt by that stickier higher interest rate backdrop. Lower rates are certainly important support if you want to see small caps grind higher like earlier this year."
Volume seen flagging on shortened schedule today: A short day awaits investors as the New York Stock Exchange (NYSE) closes at 1 p.m. ET and bond trading closes at 2 p.m. ahead of tomorrow's holiday. Volume is likely to be thin, meaning sudden volatility is a possible threat. Any major moves this week and next, however, might not have staying power into January considering the seasonal low volume that implies lack of conviction either down or up. In the meantime, Treasuries might continue calling the shots. Futures trading pegs odds of just two rate cuts in 2025 at nearly 70%, according to the CME FedWatch Tool. That means the market generally sees the Fed holding near 4% by the end of next year, setting up relatively tight borrowing conditions compared with the previous outlook of below 3.5%.
Stocks on the move
- Mega cap stocks including Nvidia (NVDA), Tesla (TSLA), and Apple (AAPL) were generally a touch higher in pre-market trading today and often set the tone for the rest of the market. Tech led the way yesterday and eventually made the difference in pulling major indexes up. Nvidia may be climbing in anticipation of a major speech in early January from CEO Jensen Huang, Barron's reported. This could represent a chance for the company to unveil more details about its next-generation Rubin chip.
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Broadcom (AVGO), now a $1 trillion stock along with the Magnificent Seven, climbed 2.4% ahead of the open. Shares built on yesterday's gains that came following a price target rise from UBS, which also raised its estimates for AVGO's earnings per share in 2026 and 2027.
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American Airlines (AAL) fell 1.3% after grounding all flights nationwide due to a technical issue, news reports said. The ground stop was lifted soon before the open but shares didn't take back off.
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U.S. Steel (X) fell 1.2%. Nippon Steel's $15 billion bid to buy the company has been referred to President Biden, Reuters reported, giving the president 15 days to decide on whether to approve a deal he has opposed. Incoming President Trump also has expressed opposition to the deal.
- Big banks including JPMorgan Chase (JPM) and Goldman Sachs (GS) climbed slightly after CNBC reported that the biggest banks are planning to sue the Fed over its annual bank stress tests.
More insights from Schwab
Tax class: Thinking about taking a tax deduction? Check Schwab's "Tax Deduction Basics and Tips," which will teach you about the types of tax deductions, how they work, and how they may or may not apply to you and your taxes.
The small cap Russell 2000 index (RUT—purple line) is having its worst year relative to the S&P 500 index (SPX—candlesticks) since 1998. The SPX is up about 25% year to date versus 10% for the RUT, though the RUT did rally in November to three-year highs before losing ground as Treasury yields resumed their climb. The SPX began today down about 2% from its all-time high close of 6,090 set December 6.
The week ahead
Check out the Investors' Calendar for a summary of the top economic events and earnings reports on tap this week.
December 25: U.S. markets closed for Christmas holiday.
December 26: Weekly initial jobless claims.
December 27: November retail and wholesale inventories.
December 30: November pending home sales.
December 31: No major data or earnings expected.
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