Bank of America strategists just warned that the one thing capable of killing the much-anticipated Santa Claus rally is… Santa Claus himself arriving too early and too generously. A Federal Reserve that sounds excessively dovish next week could accidentally scare the stock market into a festive tantrum.
If the Fed blinks too hard and signals deeper trouble ahead, the long end of the Treasury curve could throw up faster than Uncle Gary after eggnog, dragging stocks down with it. Suddenly the same rate cuts everyone has been begging for might be interpreted as “Houston, we have a problem,” turning December cheer into December fear in the time it takes to say “pivot.”
Investors who spent 2025 salivating over lower rates could discover that getting exactly what they wished for feels suspiciously like coal in the portfolio.
The S&P 500 is currently lounging a mere 0.5% below its all-time high, sipping hot cocoa and waiting for the traditional year-end surge. Seasonal history says stocks usually climb this time of year, unless, of course, someone spikes the punch.
Enter Michael Hartnett and the Bank of America strategy team, who published a note essentially titled “Be Careful What You Wish For.” They argue that if the Fed sounds too cheerful about cutting rates, markets might hear “the economy is secretly dying” and promptly stage a dramatic exit.
Hartnett’s exact wording was deliciously ominous: “Only thing that can stop Santa Claus rally is dovish Fed cut causing a selloff in long-end.” Translation: Father Christmas might accidentally moonwalk off the roof while carrying the sack of gains.
Traders currently assign better than 90% odds to a quarter-point cut on December 10, up from 60% a month ago. They have also penciled in three full cuts by September 2026, because nothing says “happy holidays” like borrowing money on the cheap.
Yet the same crowd that spent all year chanting “cut, cut, cut” could panic if the Fed actually sounds eager to cut. It’s the financial equivalent of screaming for ice cream and then freaking out when someone hands you a triple scoop in January.
Making matters spicier, two key data releases—jobs and inflation—are delayed because of the recent government shutdown. So the Fed meets, speaks, and only afterward do we get the reports that might prove they overreacted. It’s like a referee calling a penalty and then reviewing the replay two weeks later.
Bank of America’s solution? Prepare for the government to eventually step in and keep inflation from roaring and unemployment from hitting 5%. Their recommended shopping list includes “inexpensive” mid-cap stocks plus cyclicals such as homebuilders, retailers, REITs, and transportation names—basically everything that thrives when the economy refuses to roll over and play dead.
In short, the firm is betting that policy makers will slam whatever brakes or accelerators are necessary to keep growth humming along at that perfect lukewarm temperature markets love. Because nothing ruins a rally faster than either a recession or runaway prices, and apparently the Fed might accidentally hint at the former while trying to prevent the latter.
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