Bank of America Warning: If the Fed Cuts Rates Dovishly Next Week, the "Santa Claus Rally" May Be Canceled

On December 5, Bank of America strategists stated that if the Federal Reserve’s economic outlook next week is overly cautious, the year-end rally in the stock market could be at risk. Currently, the S&P 500 Index (SPX) is approaching its all-time high, and investors are confident in a best-case scenario of “Fed rate cuts, easing inflation, and resilient economic growth.” However, Bank of America strategist Michael Hartnett said in a report that if the Fed sends a dovish signal at next week’s meeting, it could actually put this optimism to the test—because it may suggest the economic slowdown is greater than expected. “The only thing that can stop the Santa Claus rally is a dovish Fed rate cut triggering a sell-off in long-dated US Treasuries,” Hartnett wrote in the report, with “long-dated” referring to longer-term US government bonds. Currently, the S&P 500 Index is only about 0.5% below its October peak, and seasonal trends typically favor a year-end rally. However, due to the government shutdown, key employment and inflation data scheduled for later in December will be delayed, exposing the market to these two major risk events. Hartnett and his team also pointed out that the US government may intervene to prevent inflation from remaining high and the unemployment rate from rising to 5%. They suggest that, to prepare for this possibility, investors consider allocating to “undervalued” mid-cap stocks in 2026.