Will there still be a traditional Christmas rally in the U.S. stock market this year?
After experiencing a round of intense selling, the U.S. stock market has simultaneously repaired its technical and positioning aspects, with major Wall Street institutions like Goldman Sachs issuing signals for a year-end rebound. However, behind this potential "Christmas rally" lurks a risk that is harder to ignore: inflationary pressures are accumulating at a pace that surpasses that during the COVID-19 pandemic, and the bill will be due in January.
On November 13, Goldman Sachs strategist Cosimo Codacci-Pisanelli bluntly asked in the latest macro report: "Can Christmas come early?" His answer was affirmative.
The recent significant pullback in the stock market, the decline in valuation multiples, the substantial reduction in market positioning, and the support from seasonal factors collectively create the conditions for a year-end short squeeze in risk assets.
At the same time, Morgan Stanley and JPMorgan also issued similar signals, with the former's data indicating that the AI sector is experiencing the largest scale of concentrated liquidation and deleveraging in over 15 years, while the latter directly advised clients to buy on dips.
However, the narrative of this year-end rebound itself contains an inherent paradox: when Goldman Sachs, Morgan Stanley, and JPMorgan almost simultaneously call out the same trading direction, the originally niche "year-end short squeeze" turns into a crowded consensus trade. Codacci-Pisanelli himself admitted at the end of the report that the trading logic for 2026 is precisely to "short every consensus trade."
Extreme Positioning Cleanout, Short Squeeze Conditions Formed
The core argument for this potential rebound primarily comes from the extreme cleanout of positioning.
According to Goldman Sachs, this round of deleveraging is "one of the most aggressive phases in the past decade," with net positions and total positions on its U.S. prime brokerage book contracting significantly. On the day the news of Nvidia's board searching for a successor to Jensen Huang hit the market, the Nasdaq fell by about 5 standard deviations in a single day.
Data from Morgan Stanley corroborates this. According to Bloomberg, Morgan Stanley's prime brokerage business found that hedge funds' net positions in the AI sector have recently turned underweight, marking the first time since 2023, and the duration of this round of hedge fund deleveraging is the longest in over 15 years. Last week, JPMorgan also informed clients that current market sentiment is "quite poor—yet this should be a bullish signal."
Goldman Sachs believes that the market has digested multiple negative factors within a single week—including stronger-than-expected CPI data, hawkish statements from the Federal Reserve, rising interest rates, increasing oil prices, and negative news about Nvidia—while prices have remained relatively stable, which itself indicates that "selling pressure is nearing exhaustion." In the absence of remaining selling pressure, even bad news is unlikely to further depress prices.
Valuation Returning to Mean, EPS Expectations Upgraded
Valuation repair is the second pillar of Goldman Sachs' rebound logic.
Codacci-Pisanelli pointed out that after this round of valuation multiple contraction, global stock market valuations have returned to "near the long-term historical average of 35 years." Specifically, the MSCI Global Index's 12-month forward price-to-earnings ratio has dropped to 15.6 times, and the price-to-earnings growth ratio (PEG) has fallen to 1.1 times, both close to historical averages since 1997.
Meanwhile, earnings expectations have not been downgraded in tandem. The market's consensus EPS estimates for 2026, 2027, and especially 2028 have recently been continuously revised upward at a pace that exceeds historical norms, with the earnings expectation curve for 2028 described by Goldman Sachs as "looking more like a meme stock than a profit forecast line."
Against the backdrop of currently high real interest rates, the absolute valuation of U.S. stocks no longer appears excessively stretched. Goldman Sachs conducted a regression analysis of the S&P 500's forward price-to-earnings ratio against the 10-year real interest rate, finding that the current real interest rate is about 2.25%, corresponding to a reasonable valuation of about 18.9 times, while the S&P is currently trading at about 17.9 times—about one multiple unit below the regression line.
Goldman Sachs admits that the outlook for the AI sector "remains highly uncertain," and has set the key verification point for the demand side during the fourth-quarter earnings season. However, in the six weeks prior, there have been limited new panic catalysts—this is precisely a typical breeding ground for a short squeeze.
Inflation Pipeline Pressure, Far Exceeding Pandemic Peaks
The opposite of the Christmas rally is the more unsettling part of Goldman Sachs' report.
Codacci-Pisanelli wrote that U.S. CPI exceeded expectations in both September and October, with a broad range of surprises. Global manufacturing import price inflation, calculated on a six-month annualized basis, is currently about 24%, significantly exceeding the levels during the inflation peak of 2021 to 2022; the annualized increase in global producer prices is about 11%.
The scope of inflation diffusion is also extending, no longer limited to energy and AI hardware, but spreading downstream to categories such as chemicals, plastics, and paper products.
In the U.S., Germany, France, Italy, and the U.K., the proportion of import price categories with an annualized increase exceeding 5% has surged to about 25% to 40%; in the U.S., this proportion exceeds 40%, a level last seen on the eve of the inflation wave of 2021 to 2022.
The PPI data released on Friday did not change this picture. Although the month-on-month growth rate of October PPI was slightly below expectations at 0.3%, year-on-year it was 6.5%, but inflationary pressures remain significant. The CPI released the previous Tuesday was only below one out of 70 forecasts, indicating the broadness of the surprises.
Goldman Sachs believes that companies are currently absorbing rising input costs by compressing profit margins, but how long this buffer can last is the core issue.
January is the Real Test
Upstream price pressures typically take 6 to 12 months to fully transmit to the consumer end, which means the bill will be due in the first quarter of next year.
Goldman Sachs has conducted detailed data calculations on the "January price reset effect": historically, January is the month with the most concentrated large resets of price components throughout the year, with about 16 components experiencing price jumps exceeding 2 standard deviations in January, while in other months this number usually does not exceed 2.5. The European market also shows the same seasonal pattern, with core HICP data in January often reflecting one of the largest increases of the year since the pandemic.
It is against this backdrop that Goldman Sachs economists have raised their Federal Reserve interest rate hike predictions following the latest CPI data, adding a third rate hike.
Codacci-Pisanelli also pointed out a hidden reflexive loop: the reason central banks leaned dovish previously was largely constrained by the pressures from stock market declines and credit tightening. If the stock market stabilizes and the financial environment subsequently loosens, the rationale for central banks to continue waiting would no longer exist.
In other words, if the year-end short squeeze comes true, it is precisely overextending the future upside potential, and after the revelry, a "hangover" is inevitable. In terms of interest rate trading direction, Goldman Sachs clearly stated:
Being long on front-end inflation is a good complement to the current investment portfolio.
Goldman Sachs itself also admitted in the report that 2026 "will be an extremely difficult year for macro traders, with pitfalls almost everywhere across major asset classes"; and in hindsight, the most effective trading rule for that year will actually be just one—"short every consensus trade."
As Codacci-Pisanelli wrote at the end of the report: even if Santa Claus arrives as scheduled, the intermediate goods PPI increase caused by energy shocks has exceeded the final demand price increase by a factor of two, manufacturing import price growth has surpassed pandemic peaks, and major companies are waiting for January to reprice—this bill, regardless of whether the Christmas rally materializes, will be delivered on time in the first quarter of next year.
The last line of the report reads: "Good luck."