Investors Favor Defensive Stocks Amid Santa Claus Rally Hopes

Momentum, Data and Policy Uncertainty Are Shaping December’s Market Outlook

As December 2025 begins, investors are hoping for a so-called Santa Claus rally, but while there are reasons for optimism, a closer look at the data suggests a cautious approach.

Major equity indexes logged their best week since April in the Thanksgiving holiday-shortened week ending November 28, buoyed by rising expectations that the U.S. Federal Reserve might cut interest rates in December. Nevertheless, November was the worst month for stocks since April, as AI valuation worries weigh on the tech stocks that have driven a bull market for the past three years.

Underpinning the late November rally was a dramatic pivot in interest rate expectations. Just days before the surge, the odds of a December Fed cut were 30-35%. By late November, they jumped above 80%, sparked by comments from New York Fed President John Williams and soft economic data. Lower rates would signal renewed economic support, acting as a key trigger for banks (by spurring lending) and defensives such as staples, which thrive as safe havens in a low-yield environment.

For individual and professional investors alike, the message is clear: Diversify beyond tech and instead lean into banks and defensives for resilience while the tech titans take a breather. It’s not about chasing the next big thing; it’s about building portfolios that can weather a potential coming storm.

Sector Rotation Quietly Takes Place, Favoring Defensive Positioning

Beyond the headlines, the U.S. stock market is quietly undergoing a meaningful sector rotation. Investors are selling major tech stocks—especially the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla)—and instead buying stocks in more defensive sectors. Our Quantmatix analysis of recent trading activity confirms this shift from high-growth tech stocks to banks, consumer staples, and essential services, reflecting a preference for stability at a time when the world’s richest economy faces an uncertain environment heading into 2026. Sectors with positive moment include: