Wall Street Regains Its Swagger: Is the 'Santa Claus Rally' Finally Here?

After spending much of December speculating whether the year-end "Santa Claus Rally" would materialize, equity traders may finally have witnessed the pivot they've been waiting for.

The S&P 500 advanced 0.8% on Thursday, snapping a four-day losing streak, and closed with similar gains on Friday. This marks the conclusion of the final full trading week of the year.

If history is any guide, the US market appears poised for further upside. According to data from Citadel Securities, since 1928, the S&P 500 has risen during the last two weeks of December 75% of the time, posting an average gain of 1.3%.

Despite lingering concerns regarding the long-term viability of the AI trade and elevated valuation levels, resilient economic data and corporate earnings prospects are underpinning investor confidence. Observations from Susquehanna International Group indicate that traders are aggressively bidding up call options on chipmakers and tech heavyweights, while retail enthusiasm for US equities remains undiminished.

Goldman Sachs' trading desk noted in a report to clients: "Absent a major shock, the current seasonal strength combined with clearer positioning will be difficult to reverse."

"While we are not expecting a violent rebound, we see room to run from current levels through year-end," added Goldman team member Gail Hafif.

Tech Sector Leads the Charge

Thursday's initial rebound was catalyzed by a softer-than-expected inflation report (despite some debate over the details), which cemented expectations for further rate cuts next year. Technology stocks led the broader market, with the Bloomberg Magnificent 7 Index surging 2% and the Nasdaq 100 climbing 1.5% after five days of chop.

The momentum carried into Friday, driven by significant gains in names like Micron Technology and Oracle, pushing the Nasdaq 100 up another 1%.

"Tech companies—specifically those tied to AI—had been under considerable pressure," noted Thomas Martin, Senior Portfolio Manager at Globalt Investments. "But when Micron reported earnings and the market reacted optimistically, it fueled the sentiment that perhaps it is time to buy these names back."

A Surge in Bullish Option Flows

The rally is a welcome development for derivatives traders, who have been accumulating call options in recent days to bet on a continued tech rebound.

According to Susquehanna, traders have been heavy buyers of bullish call spreads tied to Nvidia, Micron, and the Technology Select Sector SPDR Fund (XLK). Simultaneously, they have been selling put options on giants like Alphabet, Nvidia, and Broadcom.

Notably, the broader AI ecosystem—whether tied to the "Google chain" or the "OpenAI chain"—has seen broad-based gains over the past 48 hours.

"This highlights the market's confidence that any downside is limited and transitory," said Chris Murphy, Co-Head of Derivative Strategy at Susquehanna. "Investors are utilizing the pullback in tech to add exposure to AI, semiconductors, and growth, rather than capitulating."

Retail and Institutional Money Flows

The broader market backdrop remains supportive. Goldman Sachs reports that investors have plowed approximately $100 billion into US equities over the past nine weeks, continuing a trend of inflows seen throughout 2025. The firm's sentiment indicator has reached its highest level since April.

Retail investors—the primary engine of this year's rally—show no signs of fatigue. Data from Citadel Securities reveals that retail traders have been net buyers of call options in 32 of the past 33 weeks, the longest buying streak on record for the firm.

"Following a year of robust portfolio returns and record household wealth creation, retail investors are entering 2026 with high confidence and ample capital," Scott Rubner, Head of Global Sports and Entertainment (and Tactical Specialist) at Citadel Securities, wrote in a note. He added that the conditions are ripe for "expanded market participation."

Rubner also noted growing optimism among institutional investors, who have not only been sweeping call options across the board but are also rotating into sectors beyond big tech. Interest-rate-sensitive sectors, such as Real Estate and Industrials, have flashed strong buy signals for the second consecutive week.

The Setup for a Year-End Rally

As trading volumes thin out seasonally, declining volatility is providing another tailwind. The S&P 500’s 10-day realized volatility has dropped to one of its lowest levels of the year. This dynamic often forces volatility-control funds and trend-following CTAs (Commodity Trading Advisors) to increase their equity exposure.

"We continue to see room for further volatility compression," the Goldman trading desk stated. "Lower implied volatility means systematic leverage strategies will gain more traction."

The past two days of gains have served as a much-needed respite, leading more market participants to bet on the traditional "Santa Claus Rally."

According to the Stock Trader's Almanac, the "Santa Claus Rally"—technically defined as the last five trading days of the year plus the first two of January—has historically produced an average gain of 1.3% for the S&P 500 since 1950.

This year, that window opens next Wednesday and runs through January 5.

"This week's economic data has solidified the expectation that the Fed will proceed with rate cuts," said Angelo Kourkafas, Senior Global Investment Strategist at Edward Jones.

While Kourkafas cautioned that some investors might look to lock in profits after a solid year, creating potential selling pressure, he concluded that the latest data "likely gives the green light for this year's Santa Claus Rally."