Santa Rally Faces Fed and Tesla Tests

As global markets enter the final trading week of 2025, liquidity is thinning, but the stakes remain surprisingly high. Investors are bracing for the traditional "Santa Claus Rally"—a seasonal phenomenon covering the last five trading days of December and the first two of January—which has historically delivered consistent gains. However, with Wall Street closed on Thursday for New Year’s Day and institutional participation dwindling, volatility could spike on relatively minor news.

This year, the festive optimism faces a formidable test: a Federal Reserve that has signalled a more hawkish stance for 2026 and a looming deadline for Tesla’s autonomous driving ambitions.

Since 1969, the S&P 500 has averaged a 1.3 per cent gain during the Santa Claus Rally period, posting positive returns roughly 78 per cent of the time. This trend is often driven by tax-loss harvesting, pension fund rebalancing, and "window dressing"—where fund managers buy performing stocks to show winning positions in their year-end reports.

However, historical precedent is battling present-day reality. The market is contending with persistent inflation concerns and recent weakness in the technology sector, specifically regarding the sustainability of AI infrastructure earnings. If the rally fails to materialise this week, technical analysts warn it could be a harbinger of weaker performance in early 2026. In low-volume environments, price movements are often exaggerated, meaning momentum-driven selloffs can occur with little fundamental justification.

The week’s primary fundamental catalyst arrives on Tuesday at 2:00 pm (ET) with the release of the Federal Open Market Committee (FOMC) minutes. These documents will offer a forensic account of the December policy meeting, where the central bank cut rates but simultaneously projected fewer cuts for 2026.

Global investors will be scrutinising the text for details on the internal debate shaping this cautious outlook. Specifically, the market is looking for consensus on what conditions would warrant a pause in the cutting cycle. Any commentary suggesting anxiety over "sticky" inflation or asset price bubbles could rattle markets that are currently pricing in a smoother path to monetary easing. If the minutes reveal a deeper rift among policymakers regarding the 2026 trajectory, the reaction in bond yields and currency markets could be sharp, given the holiday-thinned liquidity.

Beyond macroeconomics, all eyes are on Tesla (TSLA). CEO Elon Musk faces a self-imposed year-end deadline to deliver unsupervised robotaxis in Austin, Texas. Unlike his previous vague timelines, this specific commitment carries significant weight for the stock’s valuation.

A successful demonstration of truly driverless operation would be a watershed moment, validating the company’s massive capital expenditure on Full Self-Driving (FSD) technology.

However, scepticism remains elevated. Musk has a decade-long history of optimistic predictions that have failed to materialise on schedule. Even a limited success within a geofenced area would raise questions about regulatory approval and commercial scalability. Conversely, a failure to deliver could force a repricing of the "autonomy premium" currently baked into Tesla’s share price as investors reassess the timeline for Level 4 operations heading into the new year.

The economic calendar is sparse but significant. Wednesday’s Chicago PMI will offer a final read on industrial health for 2025, while Friday’s Manufacturing PMI will provide the first snapshot of 2026. These indicators will set the baseline for January’s trading strategies.

As the curtain falls on 2025, the transition to 2026 will likely be dominated by themes of AI monetisation, geopolitical trade shifts, and the Fed’s battle to balance inflation against labour market cooling. Investors should use this quiet period not to chase holiday volatility, but to stress-test their portfolios against a potentially more turbulent policy landscape in the year ahead.