AI bubble fears are holding back a 'Santa Rally' in stocks, analyst says

One financial analyst predicted a holiday-themed rally once the Federal Reserve slashed interest rates by another quarter-point in December. However, fresh fears about a bubble in the growing AI sector is dampening enthusiasm in the stock market, he said.

"It’s starting to look a lot like Christmas," Kyle Rodda, a senior financial market analyst for Capital.com, said in an investor note. "But despite that, the Santa Rally hasn’t really taken off yet. Even with a dovish cut from the Fed last week, which would ordinarily set the bulls (and reindeer?) running, valuation concerns are again raining on the parade."

He wrote that the biggest question in 2026 will be whether AI delivers on an explosion of worker productivity that ultimately benefits the economy. "For all that artificial intelligence promises to do, its benefits, especially when it comes to growth and productivity, are still to be determined," he said.

The Federal Reserve cut interest rates for a third time this year on Wednesday, aligning with analysts' expectations. Fed Chair Jerome Powell said the central bank will adopt a "wait and see" approach to determine whether further rate cuts are needed in the face of a weakening labor market and lingering inflation.

Investors' AI fears were renewed last week when Oracle $ORCL's stock fell by as much as 16% following the release of its earnings report, which showed its AI spending far outpacing returns. It shaved as much as $70 billion off the company's valuation, and its stock has been on a downward slide since.

Financial markets on Monday were wobbly. The Dow Jones Industrial Average dropped close to 70 points in the morning, or 0.1%. It was the same story for the S&P 500, which lost 8 points, or 0.1%.