Bank of America Warning: If the Fed Turns Dovish and Cuts Rates Next Week, the "Santa Claus Rally" Could Be in Jeopardy

BlockBeats News, December 5th - A Bank of America strategist said that if the Federal Reserve is too cautious about the economy next week, the year-end stock market rally could be at risk. Currently, the S&P 500 index (SPX) is nearing its historical record high, and investors are confident in the best-case scenario of "Fed rate cuts, falling inflation, and resilient economic growth."

However, Bank of America strategist Michael Hartnett stated in a report that if the Fed sends a dovish signal at next week's meeting, this optimistic sentiment may face a test because it could imply a more significant economic slowdown than expected. "The only thing that can stop the Santa Claus rally is a Fed dovish rate cut triggering selling in the long end of the U.S. Treasury market," Hartnett wrote in the report, with the "long end" referring to longer-term U.S. government bonds.

The S&P 500 index is currently only about 0.5% away from its peak in October, and seasonal trends are usually favorable for a year-end rally. However, due to the impact of the government shutdown, key delayed employment and inflation data will be released later in December, putting the market to the test with these two major risk events. Hartnett and his team also pointed out that the U.S. government may intervene to prevent high inflation and a rise in the unemployment rate to 5%. They recommended that to deal with this possibility, one could invest in "attractively valued" mid-cap stocks for 2026.