As 2025 draws to a close, Wall Street finds itself caught between two forces: growing doubts about the AI trade that powered this year’s gains and the historically reliable seasonal patterns that have lifted markets in December for nearly a century.
The tension has left investors debating whether to chase the rally or brace for a pullback.
“Crowded Trades Don’t Gift Easy Money”
The Santa Claus rally, covering the last five trading days of December and the first two of January, has delivered gains 79% of the time since 1929, with an average return of 1.6%. Over the past eight years, the decline has occurred only once.
Yet skeptics argue this pattern has become too well-known for its own good. “Seasonality works until everyone believes it does — this is the most obvious trade of the year, and that’s the problem,” one investor wrote on X. The core argument is simple: markets punish consensus, not reward it.
Risk assets beyond equities are also showing cracks. Bitcoin is trading at around $89,460, down 6.9% over the past month after failing to sustain levels above $95,000 in late November. The cryptocurrency’s market cap now stands at approximately $1.78 trillion.
AI’s Moment of Truth
The more fundamental concern lies in the AI sector that drove the S&P 500’s $30 trillion bull run over the past three years.
According to Bloomberg, signs of skepticism are mounting — from Nvidia’s recent selloff to Oracle’s plunge after reporting higher-than-expected AI spending to souring sentiment around OpenAI-linked companies. “We’re in the phase of the cycle where the rubber meets the road,” said Jim Morrow, CEO of Callodine Capital Management. “It’s been a good story, but we’re sort of anteing up at this point to see whether the returns on investment are going to be good.”
The cost burden is staggering. Alphabet, Microsoft, Amazon, and Meta are projected to spend over $400 billion on data centers in the next 12 months. Their combined depreciation expenses are set to triple from about $10 billion in late 2023 to $30 billion by late 2026.
A Teneo survey cited by the Wall Street Journal found that fewer than half of current AI projects have generated returns greater than their costs. Yet 68% of CEOs plan to increase AI spending in 2026. The survey showed that marketing and customer service were the most productive uses of AI, while applications in security, legal, and human resources lagged.
There is also a gap in expectations: 53% of institutional investors expect returns within six months, while 84% of large-company CEOs believe it will take longer.
The Case for Optimism
Still, comparisons to the dot-com bust may be overblown. The Nasdaq 100 currently trades at 26 times projected profits, far below the 80-plus multiple seen at the height of the 2000 bubble. Nvidia, Alphabet, and Microsoft all trade at less than 30 times earnings.
And history favors the bulls. According to financial newsletter The Kobeissi Letter, the final two weeks of December have been the best weeks for stocks over the past 75 years, with the S&P 500 potentially reaching 7,000 by year-end.
In the short term, seasonal strength and FOMO could continue to support markets. But heading into 2026, whether AI investments deliver real returns will be the key variable determining the market’s direction.
