The Christmas stock market rally is long overdue

As investors head into a week that is traditionally decisive for year-end performance, they find themselves awkwardly perched between two seats. Indeed, straddling the proverbial fence. On one side, the US Federal Reserve has continued its rate cuts. On the other, doubts are growing louder over the profitability of the vast sums poured into artificial intelligence. A return to macro data, central bank decisions, and the so-called Kevin Awards promise to liven up the week.

Let's begin with what happened on Friday, at an hour when you hopefully had better things to do than tracking the final ticks of Wall Street. The Fed's rate cut support over the past week was not enough to prevent a sharp downturn in US indices on Friday. The culprits? Two AI darlings that stumbled. Broadcom, the chipmaker star, posted solid results boosted by AI, but the market abruptly decided it wanted even more spectacular figures to justify paying 76 times this year's expected earnings. Broadcom, in fact, is currently exactly twice as expensive as Nvidia, which is itself no bargain with a P/E ratio of 38.

The other name under scrutiny is Oracle. Again, the results weren't disastrous, but the company's all-in move into data centres comes at a time when the profitability of such ventures is increasingly being questioned. One look at the forecast income statement tells the story. Oracle's capital expenditure (CAPEX) is set to leap from an average of $4.3bn annually between 2017 and 2024 to over $21bn this year, and then to more than $50bn in 2026, 2027, and 2028. The problem? The company generates just $12.5bn in annual cash flow under normal conditions. In other words, external funding will be needed—which Oracle has already begun to seek, heavily. Perhaps too heavily for the market's liking, with investor nerves clearly fraying. To top it off, Bloomberg dropped a bombshell on Friday, reporting that Oracle's data centre projects for OpenAI could face delays of up to a year. Given the scale of the investment, revenue will need to start flowing sooner rather than later. Oracle has denied the claims, but failed to convince.

The result: a 13% drop last week for Oracle and an 8% decline for Broadcom, both weighed down by hefty Friday losses. That didn't do the Nasdaq 100 any favours, which closed the day down 1.9%. Notably, non-tech sectors and more staid equities fared better: the Dow Jones and the Russell 2000 posted weekly gains.

The takeaway? Midway through December, the so-called Santa rally has yet to make an appearance. Statistically, the week now beginning is supposed to be pivotal if tradition is to hold. However, recent years have done little to inspire faith in seasonal probabilities. True, 2023 closed with a 4.4% gain, but 2022 ended down 5.9%, and 2024 finished with a 2.5% drop for the S&P 500.

Still, the broad US index is up 16.1% year-to-date in 2025, slightly ahead of Europe's Stoxx 600, which has gained 13.9%. Yet when dividends are factored in, the two are neck and neck: +17.1% for the S&P 500 Total Return versus +16.9% for the Stoxx Europe 600 Total Return. Europe's greater dividend generosity accounts for the difference. Whatever the eventual winner, and barring a year-end catastrophe, 2025 is shaping up to be a strong year for equities, with the US market's long-term average real return hovering around 9% over the past quarter-century.

Now, the key developments to start your week well:

• Donald Trump is reportedly considering Kevin Warsh or Kevin Hassett for the Federal Reserve chairmanship, according to the Wall Street Journal. If you know a Kevin, do submit their CV. The WSJ also reports that Trump has admitted uncertainty over whether the impact of his economic policies will be felt in time for the midterm elections.
• Volodymyr Zelensky has suggested that US security guarantees could replace Ukraine's NATO candidacy. Another round of talks between US and Ukrainian officials is scheduled for today. Russia wants the Donbas; Ukraine seeks more modest concessions. Washington is expected to mediate.
• A deadly antisemitic attack in Australia has left 16 dead, including one of the perpetrators.
• Chile has taken a sharp turn to the right with the presidential victory of José Antonio Kast.
• China released weaker-than-expected November data overnight for retail sales and industrial production. Nonetheless, consumer-related stocks are holding up, buoyed by government pledges to bolster household spending.
• Macro calendar: In the US, the normalisation of economic data releases disrupted by the shutdown is ongoing. This week brings two key prints: November's jobs report (Tuesday) and inflation data (Thursday). December flash PMIs for major economies are also due (Tuesday), along with several monetary policy decisions: the eurozone and UK on Thursday, Japan on Friday.
• Corporate earnings: This week sees results from Micron (semiconductors), Accenture (consulting), Nike (sportswear), and FedEx (logistics).

Asia-Pacific markets are under pressure this morning. Hong Kong and mainland China are in the red following the disappointing Chinese data. Japan and South Korea are down more than 1%, dragged by their tech sectors. India is flat, and Australia is down 0.7% amid a pullback in industrial commodity prices, which is hitting the mining sector. That said, Western futures are firmly in positive territory, and Europe is set to open the week with a rebound.

Today's economic highlights:

On today's agenda: the Tankan Large Manufacturing Index in Japan; industrial production and retail sales in China; industrial production in the eurozone; in the United States, the Empire Manufacturing and the NAHB Housing Market Index. See the full calendar here.

• GBP / USD: US$1.34
• Gold: US$4,343.67
• Crude Oil (BRENT): US$61.37
• United States 10 years: 4.17%
• BITCOIN: US$89,587.7

In corporate news:

• HSBC has received endorsement for its $13.6 billion proposal to take Hang Seng Bank private.
• Nomura is enhancing its global alternatives business by acquiring private-debt asset-management firms.
• Nordea will increase its 2-8 year mortgage rates and has received a buy recommendation for its stock.
• Sika AG is acquiring Swedish mortgage company Finja to expand in the Nordic region.
• Skanska has secured a 550 million krona construction contract for a sports facility in Kungsbacka.
• Truecaller projects a 30% decrease in Q4 advertising revenue, with earnings between SEK 210-230 million.
• Kongsberg has secured a $240 million contract to supply Joint Strike Missiles to the U.S. Air Force.
• iRobot Corp has filed for Chapter 11 bankruptcy and will be acquired by Picea, leading to delisting from NASDAQ.

See more news from UK listed companies here

Analyst Recommendations:

• International Workplace Group Plc: Investec maintains its buy recommendation and raises the target price from GBX 293 to GBX 334.
• Bridgepoint Group Plc: Deutsche Bank upgrades to buy from hold with a target price of GBX 345.
• Unilever Plc: Landesbank Baden-Wuerttemberg upgrades to buy from hold with a price target raised from GBX 4700 to GBX 5500.
• Volution Group Plc: Peel Hunt upgrades to buy from add with a price target raised from GBP 7.25 to GBP 735.
• Mony Group Plc: RBC Capital maintains its outperform recommendation and reduces the target price from GBX 260 to GBX 250.
• Firstgroup Plc: RBC Capital maintains its outperform recommendation and raises the target price from GBX 245 to GBX 250.
• Reckitt Benckiser Group Plc: Morgan Stanley downgrades to market weight from overweight with a target price of GBX 6100.