The end of the year is approaching, and with it investors’ hopes for the traditional year-end rally. This is, of course, the so-called Santa Claus Rally, or more broadly, the end-of-year market rally. Will it happen this year? That remains uncertain. On the one hand, there is confidence in the continuation of the bull market, supported by strong corporate earnings; on the other, growing concerns about market overvaluation and the possibility of corrections. This mix of emotions may lead to higher volatility and increased importance of defensive strategies.
Since the beginning of the year, investors have had little reason to complain. The S&P 500 has gained around 14%, and the WIG20 has surged by nearly 33%. Both rates of return significantly exceed historical averages. Such strong performance creates the temptation to squeeze out even more gains before the year closes, but it also highlights the rising risk of a correction. Anticipation of a rally can lead to less rational decision-making, especially when investors act on emotion and fear missing out on potential upside.
The positive market picture is reinforced by solid results from American companies. The quarterly reporting season delivered strong figures, and forecasts for 2026 point to further earnings growth—on average 13% for U.S. firms and 9% for European ones. In 2027, however, Europe may partially close the gap, with expected earnings increases of 10.8% and 11.7%, respectively. This shows that European equities should not fall off investors’ radar.
December has historically been a good month for equities, and the lower number of transactions during the holiday period can amplify even moderate optimism. Added to this are year-end portfolio adjustments by funds and a rising appetite for risk fueled by signs of easing geopolitical tensions. The macroeconomic backdrop is also favorable. Inflation remains under control, and U.S. tariff policy has not triggered a new wave of price increases. This creates room for further interest-rate cuts.
Even so, it is difficult to ignore potential risks. The S&P 500 is currently trading at its highest forward P/E in more than five years. At roughly 23, it stands well above the decade-long average of 18.6. The euphoria surrounding artificial intelligence is pushing valuations higher, but many investors are asking whether these investments will truly translate into sustainable profits.
The example of well-known investor Michael Burry may serve as a warning. He has bet against shares of AI-driven companies such as Nvidia and Palantir. While his moves do not necessarily signal the end of the rally, they are a reminder that markets can behave unpredictably—especially when clear signals from the economy are lacking, and macroeconomic data, such as U.S. labor-market indicators, arrive with delays. After the recent government shutdown in the U.S., not everything is functioning smoothly yet, adding to uncertainty.
There is also no clarity regarding the Federal Reserve’s December decision. The probability of a rate cut currently stands at just 53%, whereas the market had until recently been almost certain that it would happen. Valuations remain high, meaning any negative surprise could trigger sharp reactions.
Uncertainty is a permanent feature of the market. In such conditions, risk management becomes essential. It is worthwhile to maintain a flexible portfolio, ensure proper hedging, and regularly review positions. This applies especially to active investors, but long-term investors too should check whether their portfolios still match current market conditions.
High valuations do not necessarily mean the market is about to collapse, but they do increase sensitivity to negative data and news. What is needed now is a balance between the desire for gains and the need for caution. The focus should be on quality companies with real business models capable of turning innovation into stable profits. Whether the year-end rally materializes or not matters far less for long-term investors. They can use the coming period to strategically position themselves for 2026.
