December has brought disappointing returns for U.S. stocks, prompting investors to hope for an upturn.
Despite a strong performance overall in 2024, the benchmark S&P 500 is facing challenges this month.
Historically, the last week of December into early January has seen gains, known as the “Santa Claus Rally,” averaging a 1.3% increase.
However, this year may not follow tradition.
The S&P 500 experienced its largest drop since August after unexpected signals from the Federal Reserve regarding interest rates in 2025.
Negative territory
Furthermore, the breadth of market performance is concerning, with eight of eleven sectors in negative territory for December and the equal-weight S&P 500 down 7%.
Rising Treasury yields are also a worry, with 10-year yields reaching 4.55%, the highest in over six months.
Given the S&P 500’s current trading at 21.6 times forward earnings, significantly above the historical average of 15.8, higher yields could pressure stock valuations.
Market strategist Matt Maley noted that investors are recognising the stock market’s high valuations as the Federal Reserve maintains a tighter stance than anticipated.
Yet, this week’s market pullback could have a silver lining.
It may help mitigate excess optimism in equities, potentially positioning the market for a rebound.
