By Lewis Krauskopf
NEW YORK, Dec 19 (Reuters) - Investors hoping for traditional holiday cheer for the U.S. stock market are encountering turbulence that could keep markets on edge into year-end.
Despite stock indexes remaining on track for solid performance in 2025, the benchmark S&P 500 has edged lower so far in December, bucking historical trends that have shown it to be a strong month on average.
Two themes have sparked swings in U.S. equities in recent weeks: Scrutiny on massive corporate spending
for the artificial intelligence buildout, and shifting expectations about further interest rate cuts by the Federal Reserve in 2026.
This week, questions about a data-center project from Oracle weighed on tech and other AI-related stocks, while tame inflation data on Thursday gave stocks a lift.
"This week's economic data solidifies expectations that the Fed will have a rate-cutting bias," said Angelo Kourkafas, senior global investment strategist at Edward Jones.
While investors in the coming days may look to lock in profits after a solid year, causing some selling pressure, the latest data "likely provide a green light for the Santa Claus rally to take place this year," Kourkafas said.
Since 1950, the "Santa Claus rally" has seen the S&P 500 rise an average 1.3% over the last five trading days of the year and the first two in January, according to the Stock Trader's Almanac. This year, that period starts Wednesday and runs through Jan. 5.
INVESTORS REACT TO DELAYED ECONOMIC DATA, FED
Investors this week digested a heavy batch of data that had been delayed due to the 43-day federal government shutdown. Employment data showed job growth rebounded in November but the unemployment rate stood at 4.6%, its highest level in over four years.
Another delayed report on Thursday showed the U.S. consumer price index increased less than expected in the year to November. Optimism from the cooling inflation data may be tempered by distortions, including data collection being delayed late into November, when retailers offered holiday season discounts.
The Fed has cut interest rates at three consecutive meetings, leaving investors now to parse data for insight into when the central bank might be able to ease again in 2026.
"Going into next week ... there's going to be a big question around what is the path ahead for the Fed," given the shutdown-related data distortions, said Trevor Slaven, global head of asset allocation and multi-asset portfolio solutions at Barings.
"There's this unsettled argument between the direction of travel for these major central banks, the direction of travel for inflation at a time when it does look like there's (more) softness" in the labor market data, Slaven said.
Economic reports in the coming week include third-quarter gross domestic product, durable goods orders and consumer confidence.
Focus during the holiday-shortened trading week also will likely remain on the AI trade that has helped lift stocks this year. The S&P 500 is up more than 15% so far 2025, on track for its third consecutive year of gains of at least 10%.
More recently, however, AI-related worries -- including when massive infrastructure spending will generate returns -- have dented the high-flying tech sector, which carries by far the largest weighting in major indexes such as the S&P 500.
"You're starting to just see this skepticism around the AI spend becoming more prominent," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. For the tech and tech-related stocks, "obviously their disproportionate representation in the cap-weighted index at large is helping to put some pressure on the tape."
Other sectors that had lagged this year have helped pick up the slack. Those include economically sensitive areas such as transportation, financial and small-cap groups, which are all higher so far in December.
"We've seen money move away from tech," Kourkafas said. "Other areas have stepped up and have helped keep markets mostly range-bound."
(Reporting by Lewis KrauskopfEditing by Nick Zieminski)
