Michael Hartnett Warns: Don’t Bet on a December Rally
The S&P 500 is less than 0.5% below its October peak, and seasonal trends typically favor a year-end rally.
Quick overview
- Wall Street is optimistic about a year-end stock rally, relying on continued Fed rate cuts, falling inflation, and steady economic growth.
- Top strategist Michael Hartnett warns that a cautious tone from the Fed could signal a deeper economic slowdown, jeopardizing the rally.
- The S&P 500 is close to an all-time high, but upcoming employment and inflation reports pose risks to market stability.
- Hartnett's team recommends investing in mid-cap stocks and cyclical sectors, while favoring international markets as 2025 approaches.
Wall Street is betting on a perfect scenario: the Fed keeps cutting interest rates while inflation continues to fall and economic growth holds steady. But what if that doesn’t happen?
The typical year-end stock rally may be at risk because the Federal Reserve is adopting an overly cautious view of the economy, according to top Wall Street strategist Michael Hartnett.
With the S&P 500 just shy of a new all-time high, investors are counting on the ideal outcome—rate cuts, cooling inflation, and resilient growth.
But that optimism could be challenged if the central bank strikes a more cautious tone at next week’s meeting. Such a shift, Hartnett warned, could be interpreted as a sign of a deeper-than-expected economic slowdown.
Wall Street awaits the Fed
“The only thing that can stop the Santa Claus rally is a lukewarm Fed cut that triggers selling in long-term Treasuries,” Hartnett wrote.
U.S. stocks have climbed in recent weeks, driven by expectations that the Fed will continue easing to support a labor market that’s showing signs of weakness.
Markets now assign more than a 90% probability to a quarter-point cut at the December 10 meeting, up from 60% a month ago, according to swap pricing. Traders also expect three additional cuts by September 2026.
Stocks near record highs
The S&P 500 is less than 0.5% below its October peak, and seasonal trends typically favor a year-end rally.
However, this time the market faces two key risks: delayed employment and inflation reports that will be released at the end of December following the government shutdown.
Hartnett’s team also notes that the U.S. government is likely to take steps to prevent a resurgence in inflation and to keep unemployment from rising to 5%.
Given that backdrop, they recommend positioning through 2026 in mid-cap stocks, which they view as relatively “cheap.” They also see greater upside in cyclical sectors such as homebuilders, retail, REITs, and transportation.
The strategists maintain their preference for international markets heading into 2025—a call reinforced by recent performance, as the S&P 500’s climb followed an earlier rally in the MSCI All-Country World ex-US Index.
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