Is the traditional Santa Claus rally still in store for US stocks this year?

Title context: Is the traditional Santa Claus rally still in store for US stocks this year? Text: After a sharp selloff, US equities are seeing technical and positioning repair in tandem, with major Wall Street institutions including Goldman Sachs Group, Inc. (GS.US) successively signaling a year-end rebound. But behind this potential "Santa Claus rally" lurks a risk that is harder to ignore: inflationary pressures are building at a faster pace than during the COVID-19 pandemic, and the bill will come due on schedule in January next year. On November 13, Goldman Sachs Group, Inc. strategist Cosimo Codacci-Pisanelli asked bluntly in his latest macro report: "Can Christmas come early?" His answer was yes. The recent sharp equity market pullback, lower valuation multiples, significantly reduced market positioning, and support from seasonal factors together create the conditions for a year-end short squeeze in risk assets. Meanwhile, Morgan Stanley and JPMorgan also issued similar signals in succession. Data from the former showed that the AI sector is experiencing its largest concentrated liquidation and deleveraging in more than 15 years, while the latter directly advised clients to buy the dip. However, the year-end rebound narrative itself contains an inherent paradox: when Goldman Sachs Group, Inc., Morgan Stanley and JPMorgan almost simultaneously call the same trade direction, what was originally a niche "year-end short squeeze" becomes a crowded consensus trade. And 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 cleanup, short-squeeze conditions in place The core argument for this potential rebound first comes from extreme cleanup at the positioning level. According to Goldman Sachs Group, Inc., the intensity of this deleveraging round is "one of the most aggressive phases of the past decade," with both net and gross positions in its US prime brokerage book contracting sharply in tandem. On the day when news that NVIDIA Corporation's (NVDA.US) board was looking for a successor to Jensen Huang hit the market, the Nasdaq fell by about 5 standard deviations in a single day. Morgan Stanley data corroborates this. According to Bloomberg, Morgan Stanley prime brokerage found that hedge funds' net positioning in the AI sector recently turned underweight for the first time since 2023, and the duration of this hedge fund deleveraging round was the longest in more than 15 years. Last week, JPMorgan also told clients that current market sentiment is "pretty badand that should be a bullish signal." Goldman Sachs Group, Inc. believes the market absorbed multiple negative factors within a single weekincluding stronger-than-expected CPI data, hawkish Fed rhetoric, rising rates, higher oil prices and negative NVIDIA Corporation newswhile prices remained relatively stable, which in itself shows that "selling pressure is close to exhausted." With no remaining selling pressure, even bad news struggles to push prices lower. Valuations back to mean, EPS expectations revised up Valuation repair is the second pillar of Goldman Sachs Group, Inc.'s rebound thesis. Codacci-Pisanelli pointed out that after this round of multiple contraction, global equity valuations have returned to "around the 35-year long-term historical average." Specifically, the MSCI All-Country World Index's 12-month forward P/E has fallen to 15.6x, and its PEG has dropped to 1.1x, both close to historical averages since 1997. At the same time, earnings expectations have not been revised down in tandem. Consensus EPS estimates for 2026, 2027 and especially 2028 have recently been revised up at a pace exceeding historical norms. Goldman Sachs Group, Inc. described the 2028 earnings expectation curve as "looking more like a meme stock than an earnings forecast line." Against the current backdrop of relatively high real rates, US equity absolute valuations no longer look overly stretched. Goldman Sachs Group, Inc. ran a regression of the S&P 500 forward P/E against the 10-year real rate. With the current real rate at about 2.25%, the corresponding fair valuation is about 18.9x, while the S&P currently trades at about 17.9xabout one multiple point below the regression line. Goldman Sachs Group, Inc. acknowledges that the two-year outlook for the AI sector "remains highly uncertain" and sets the key demand-side validation point at the fourth-quarter earnings season. But in the six weeks before that, there are limited new panic catalystsand that is exactly the typical breeding ground for a short-squeeze rally. Inflation pipeline pressure far exceeds pandemic peak The flip side of the Santa rally is the more unsettling part of the Goldman Sachs Group, Inc. report. Codacci-Pisanelli wrote that US CPI exceeded expectations in both September and October, and the upside surprises were broad-based. Global manufacturing import price inflation, on a six-month annualized basis, is currently about 24%, clearly exceeding the peak level of the 2021-2022 pandemic inflation period; global producer prices are rising at an annualized rate of about 11%. The scope of inflation is also broadening, no longer limited to energy and AI hardware, but spreading downstream to categories such as chemicals, plastics and paper products. In the US, Germany, France, Italy and the UK, the share of import price categories with annualized gains exceeding 5% has jumped to roughly 25% to 40%; in US producer prices, that share exceeds 40%, a level last seen on the eve of the 2021-2022 inflation wave. Friday's PPI data did not change the picture. Although October PPI rose 0.3% month on month, slightly below expectations, and 6.5% year on year, inflationary pressure remains significant. The CPI released on Tuesday was below only 1 of 70 forecasts, showing how broad the upside surprises were. Goldman Sachs Group, Inc. believes companies are still absorbing higher input costs by compressing margins, but how long that buffer can last is the core question. January is the real test Upstream price pressures typically take 6 to 12 months to fully pass through to the consumer level, meaning the bill will come due in the first quarter of next year. Goldman Sachs Group, Inc. has done detailed data estimates on the "January price reset effect": historically, January is the month with the most concentrated large resets across price components, with about 16 components posting price jumps of more than 2 standard deviations in January, while in other months that number usually does not exceed 2.5. European markets show the same seasonal pattern; since the pandemic, January core HICP data have often been among the largest increases of the year. It is against this backdrop that Goldman Sachs Group, Inc. economists, after the latest CPI release, raised their Fed rate-hike forecasts, adding a third hike. Codacci-Pisanelli also pointed out a hidden reflexive loop: central banks had previously leaned dovish largely because they were constrained by equity market declines and tighter credit conditions. If equities stabilize and financial conditions loosen accordingly, the rationale for central banks to keep waiting disappears. In other words, if the year-end short squeeze does materialize, it is precisely borrowing from future upside, and the party is bound to be followed by a "hangover." On the direction of rates trading, Goldman Sachs Group, Inc. stated clearly: Being long front-end inflation is a good complement to the current portfolio. Goldman Sachs Group, Inc. itself admitted in the report that 2026 is "an extremely difficult year for macro traders, with pitfalls almost everywhere across major asset classes"; and in hindsight, the one ironclad trading rule that worked best this year was simply to "short every consensus trade." As Codacci-Pisanelli wrote at the end of the report: even if Santa Claus arrives as promised, the intermediate-goods PPI increase driven by the energy shock has already exceeded the rise in final-demand prices by a factor of two, manufacturing import prices are rising faster than at the pandemic peak, and companies are waiting for January repricingthis bill will be delivered on time in the first quarter of next year, whether or not the Santa rally materializes. The last line of the report is: "Good luck." This article is reposted from "Wallstreetcn", author: Bao Yilong, GMTEight editor: Li Cheng