As 2025 approaches its end, Wall Street is caught between two forces: growing doubts related to artificial intelligence, which have fueled this year's rise, and seasonal patterns that have boosted the market in December for nearly a century.
This tension has made investors ponder whether to join the price rally or prepare for a downturn.
Busy trades do not bring easy money.
Santa Claus -rally covers the last five trading days of December and the first two of January. It has produced profits 79% of the time since 1929, with an average return of 1.6%. In the last eight years, a decline has only been seen once.
Skeptics, however, argue that this phenomenon has become too obvious to everyone. “Seasonality works until everyone believes in it – this is the most obvious investment of the year, and that’s the problem,” one investor wrote on X. The basic premise is simple: the markets punish consensus, not reward it.
In risky assets outside of stocks, there are also signs of deterioration. Bitcoin is trading around $89,460, which is a 6.9% drop over the past month from above $95,000 at the end of November. The market capitalization of the cryptocurrency is now around $1.78 trillion.
The moment of truth for AI
A more fundamental concern relates to AI, which has driven the S&P 500 index to a $30 trillion bull market over the past three years.
According to Bloomberg, skepticism is increasing — Nvidia's recent sales wave, Oracle's stock price crash following unexpected AI costs, and the negative sentiment towards companies associated with OpenAI. “We are now at the point in the cycle where we are hitting reality,” said Jim Morrow, CEO of Callodine Capital Management. “This has been a good story, but now we need to see if the returns on investments are really good.”
The cost burden is significant. Alphabet, Microsoft, Amazon, and Meta are set to spend over $400 billion on data centers in the next 12 months. The combined depreciation expenses of the companies will triple: from about $10 billion to $30 billion between 2023 and 2026.
According to a survey mentioned by the Wall Street Journal, less than half of current AI projects have generated profits greater than their costs. Still, 68% of CEOs plan to increase their investment in AI in 2026. In the survey, marketing and customer service were ranked as the most productive areas of AI, while security, legal, and HR applications lagged behind.
There is also a gap in expectations: 53% of institutional investors expect returns within six months, but 84% of CEOs of large companies believe it will take longer.
Reasons for optimism
Comparing it to the IT bubble may still be an exaggeration. The valuation level of the Nasdaq 100 is now 26 times projected earnings, while at the peak of the 2000 bubble, the multiples exceeded 80. Nvidia, Alphabet, and Microsoft are valued at less than 30 times earnings.
History particularly favors bulls. According to the economic letter The Kobeissi Letter, the last two weeks of December have been the best weeks for stocks in the last 75 years, and the S&P 500 could rise to 7,000 points by the end of the year.
In the short term, seasonal factors and FOMO may still support the markets. However, the actual returns on previously made AI investments in 2026 will show the direction for the markets.
