Bank of America suggests that the stock market might experience its end-of-year surge once the Federal Reserve announces its decision on interest rates this Wednesday. It’s anticipated that the central bank will reduce the benchmark interest rate by 0.25% at that meeting. Gonzalo Asis, an equity-linked analyst at Bank of America, shared in a client note that this move could pave the way for the so-called “Santa rally.” He explained that the second half of December generally becomes the year’s second most robust period for US equities. Historically, during presidential election years, the S&P has increased 83% of the time in December. According to him, the Federal Open Market Committee’s (FOMC) decision this week, which isn’t expected to cause significant market shifts based on the S&P 500’s implied move of 0.76%, might be the final obstacle before the Santa rally kicks in.
However, for the stock market to regain its footing and experience this customary holiday upswing, it may need more than just a rate cut. Recently, equities have faced challenges, with the Dow Jones Industrial Average marking declines over nine consecutive sessions—a pattern not seen since 1978.
For the market to rally, it’s crucial that there are no unexpected negative developments during Fed Chair Jerome Powell’s press conference or within the central bank’s revised economic forecasts. These projections will also include the dot plot, which outlines the anticipated trajectory of interest rates.
On Wall Street, there’s a prevailing expectation that the Fed may forecast fewer rate cuts in the future compared to their predictions in September. The labor market has shown more strength than anticipated since that last Fed meeting, and recent inflation figures suggest that price increases still surpass the Fed’s 2% target.
Market watchers will closely scrutinize these economic forecasts to gain a clearer picture of the medium-term direction for policy rates. In particular, there’s keen interest in whether the 2025 dot will indicate two or three cuts. Bank of America anticipates it will show three cuts, down from four in September. They also expect the 2026 dot to reveal two cuts and predict an upward revision in the long-term rate to 3.125% from 2.9%.
