The Santa Claus rally typically starts in late December, but Wall Street is already showing signs of holiday enthusiasm, which could potentially lead to another big year for stocks in 2026.
This follows a sharp selloff earlier this month due to fears the AI bubble might burst and indications that the Federal Reserve would not cut interest rates as much as expected.
“Santa is back,” market veteran Ed Yardeni announced in a note Saturday.
But the panic selling of Bitcoin, which he and others on Wall Street cited as a cause of the earlier downturn, has subsided, and stocks are poised for a year-end rally.
Yardeni supported his view that the S&P 500 will reach 7,000 by the end of the year and suggested that the broader market index could also reach that milestone in the coming week.
If that happens, the S&P 500 will finish 2025 with a 19% gain, after rising more than 20% in each of the past two years.
And the market may still register double digit gains from there. Earlier in the week, Yardeni confirmed his forecast for the index to reach 7,700 in 2026, indicating a 10% increase from his 2025 outlook.
“We expect 2026 to be another year of a roaring 2020, which remains our base-case scenario,” they wrote. “Our Roaring 2020 scenario has been the best of six years since we first predicted it in 2020.”
GDP growth, consumption and corporate profits are accelerating, and Yardeni said an economy-wide recession should be avoided this decade, while a “rolling recession” could hit different industries at different times.
Deutsche Bank is even more optimistic and predicts the S&P 500 will end next year at 8,000, representing a 17% jump from Friday’s close.
“We see equities continuing to benefit from a surge in cross-asset flows,” the analysts wrote in a note. “With earnings continuing to grow and companies indicating they are sticking to their capital allocation plans, we expect strong buybacks to continue.”
Elsewhere, JPMorgan expects the S&P 500 to end 2026 at 7,500, but said it could hit 8,000 if the Federal Reserve continues cutting rates.
Analysts cited above-trend income growth, a surge in AI capital spending, rising shareholder payouts and fiscal policy easing through the tax cuts in President Donald Trump’s One Big Beautiful Bill Act.
And if inflation eases more than anticipated, that would clear the way for additional Fed rate cuts beyond the two additional cuts seen by JPMorgan.
“Furthermore, the benefits to earnings from widespread deregulation and AI-related productivity gains are modest,” the bank said.
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