This time of year often brings a Santa rally to Wall Street, yet the S&P 500 share index is heading for its second week of losses and looks set for a tepid open on Wednesday.
Bullish positioning has already turned extreme, suggesting investors have opened most of their presents already, and cautious trading this week signals fear that Thursday's U.S. inflation data will be the Grinch that steals whatever is left under the tree.
Futures markets are still pricing at least two rate cuts from the Federal Reserve for 2026, but inflation signals are broadening.
U.S. jobs growth snapped back in November after a decline in the prior month, and Brent crude futures have jumped 2.1% higher on Wednesday to above $60 a barrel after Trump's fresh threats on Venezuela.
That puts geopolitics firmly into the mix of worries for next year, alongside concerns about big tech overspending, private credit risks and inflation.
Last week's punitive market response to Broadcom and Oracle's earnings were one sign that AI exuberance is running out. The rapid buildout of new data centers threatens to push up U.S. energy prices, leaving investors fretting that rising costs will put chipmakers' margins under pressure.
Asset managers' year-ahead outlooks have been broadly positive on big tech and global economic growth, but questions remain about their plans to add to bullish trades made earlier this year.
Bank of America's monthly fund manager survey, published on Tuesday, found investors' positioning was the most positive it has been in three and a half years - raising doubt about whether there are enough buyers left to sustain the trend. BofA's contrarian "Bull & Bear" gauge of market conditions, which flashes red when optimistic sentiment is stretched, is hovering just above the level that signals it is time to sell out.
Not everything is gloomy, however, with Britain providing what might have been the most unexpected bright spot of the year.
Following the release of lower-than-expected November inflation data, UK debt markets are rallying, with the ten-year gilt yield sharply lower at 4.48%
London's FTSE 100, which is stacked with cyclical businesses whose fortunes are pinned to short-term global growth forecasts and inflation-proof miners and commodities producers has raced 1.7% higher on Wednesday morning. The long-overlooked UK index is also heading for its sixth straight month of gains and remains on track to outperform both the S&P 500 and Europe's Stoxx 600 for 2025.
