Markets are heading into the final stretch of 2025 geared up for a much-hoped for ‘Santa rally’.
Our Macroscope model, which scans historical regimes to interpret current conditions, now shows the strongest parallels with October 2024. In fact, it’s almost a mirror image of that period last year when stocks sat at record highs, the Federal Reserve (Fed) had just cut rates, momentum strategies worked and investors kept buying despite persistent warnings about AI valuations. The model sits furthest from the crisis periods of August 2008 and October 2018.
Momentum dominates the factor positioning, but the model backs cyclical and commodity sectors over technology, while sitting underweight gold, which is often viewed as a crisis hedge. The model’s readings are from 11 December and do not reflect any potential impact of the tragic Bondi Beach terror attack.
Investors are heading into 2026 after a year that has tested their resilience: from whipsawing markets amid tariff turbulence and concerns over the AI capex boom, sticky inflation, and escalating geopolitical tensions. And yet, the S&P 500 is up almost17% this year, corporate earnings keep beating expectations and the Fed delivered its third straight rate cut this year last week. An FT survey of nine major investment banks forecasts that US stocks could post another year of double-digit gains in 2026,potentially supported by US President Donald Trump’s tax cuts and lower borrowing costs.
The Macroscope’s factor analysis shows that a recovery in momentum and beta factors dominate the current positioning, meaning the model expects the current risk-on trend to continue and it favours broad market exposure over selectivity.
Figure 1. It’s risk-on into 2026
Source: Man Group data, as at 11 December 2025.
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Not all glitters….
That said, this bullish backdrop confronts some harder realities heading into the new year. Our very own 2026 outlook warns that the US economy could slow and fall into a mild recession, as tariffs and other government policies, rising unemployment and other factors that may weigh on growth.
US consumer spending faces mounting pressure as households grapple with rising utility costs, student debts and rising insurance premiums. Consumer sentiment sits at remarkably low levels despite solid retail sales. Crucially, spending is increasingly concentrated among higher-income households whose wealth often correlates to stock performance.
2026 will also present something of a litmus test for the AI investment boom. Harvard Professor Jason Furman calculated how heavily the economy potentially depends on continued AI spend, but there’s scant evidence of return on investment and early results suggest the productivity gains may take longer than expected to materialise.
Global fiscal pressures have not gone away either. The US crossed a threshold this year, spending more on servicing its debt than on defence for the first time. France faces political challenges over budget deficits and the UK, Korea and Japan confront similar fiscal strains. These pressures may risk triggering greater political instability and bond market volatility.
Tariffs continue to weigh on American manufacturing as factories struggle with higher input costs while immigration enforcement has triggered labour shortages and rising wages in sectors dependent on foreign workers. These dynamics push against the disinflationary trends that allowed the Fed to cut rates, potentially limiting further easing.
Gold drop suggests little fear of crisis
It comes with the outlook territory that they tend to contain a long shopping list of potential risks every year. The model’s sector analysis suggests positioning in cyclical sectors that may benefit from economic activity and possibly inflation, while being significant underweight historic 'safe havens' like gold. We believe the underweight in gold (-59) suggests little fear of crisis or major market disruption. At the same time, it doesn’t signal tech euphoria either.
Figure 2.Surprise drop in gold and also no tech euphoria
Source: Man Group data, as at 11 December 2025.
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The parallel to October 2024 suggests that sentiment remains optimistic despite the risks. That optimism was rewarded over the past 12 months. Markets enter 2026 with hopes they may be rewarded again
All data sourced from Bloomberg unless otherwise stated. Past performance is not indicative of future results.
Author: Valerie Xiang, a Portfolio Manager at Man Numeric.
Views from the Floor is taking a short break and we look forward to seeing you back here on 6 January 2026. We wish you a very happy and peaceful holiday and a very happy new year.
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