Despite a broadly positive market session Thursday driven by cooling inflation data and hopes for future interest rate cuts, concerns are rising about the sustainability of gains among tech’s biggest players. The so-called “Magnificent Seven” have fueled much of the market’s growth this year, but analysts are now questioning whether heavy investments in artificial intelligence will erode their substantial cash flows and slow earnings. This shift is prompting a rotation toward other stocks within the S&P 500, potentially impacting the traditional year-end rally.
Wall Street’s main indexes rose on Thursday, December 18, as major technology companies rebounded from recent selling pressure. The gains followed inflation data that came in lower than expected, bolstering expectations for potential interest rate cuts by the Federal Reserve next year.
The Dow Jones Industrial Average climbed 0.14% to close at 38,951.85 points. The S&P 500 advanced 0.78% to 4,773.96 points, while the Nasdaq Composite saw a more significant increase, rising 1.38% to 14,300.36 points.
Rate Cut Expectations Rise Amid Cooling Inflation
U.S. inflation increased at a slower pace in November than economists had anticipated, according to the first data release since the mid-November end of the government shutdown. The Consumer Price Index (CPI) rose 3.1% annually in November, a decrease from the 3.2% reported in September and below the expected 3.1% growth rate.
The core CPI, which excludes volatile items like food and energy, increased 4.0% year-over-year, also falling short of the projected 4.0% increase.
The Bureau of Labor Statistics (BLS) previously announced it would not publish the headline CPI or core CPI figures for October due to data collection issues stemming from the government shutdown.
Data collection for November only began in mid-month, analysts at Capital Economics noted. “It’s possible this reflects a genuine easing of inflationary pressures, but such a sudden stop, especially in more persistent service components like housing rents, is unusual outside of a recession,” the firm wrote. “In short, we’ll have to wait until the December data is released next month to verify whether this is a statistical blip or genuine disinflation.”
The cooler inflation data strengthened expectations for rate cuts in the coming year, increasing from approximately 75% to 80%.
Earnings Reports and Notable Stock Moves
Market confidence also received a boost from strong earnings results. Micron Technology shares jumped 10% after the company exceeded first-quarter fiscal earnings expectations and provided an optimistic outlook for the current quarter, nearly doubling analyst estimates. The memory chip maker cited robust demand from the artificial intelligence industry and anticipates continued growth as more companies build out their data center infrastructure.
Micron, along with South Korea’s Samsung Electronics and SK Hynix Inc., are key suppliers of high bandwidth memory (HBM) chips, a critical component in AI processors. Shares of related companies NVIDIA Corporation (+1.8%), Meta Platforms Inc (+2.3%), and Microsoft Corporation (+1.6%) also advanced.
Elsewhere, Instacart fell 1.5% after Reuters reported the company is facing a Federal Trade Commission investigation over allegations of using artificial intelligence to discriminate in pricing.
CarMax shares declined 4.2% after the auto retailer announced plans to reduce retail margins and increase marketing investment in the current quarter, despite third-quarter sales exceeding analyst estimates.
Lululemon Athletica surged 7.9% following a Wall Street Journal report that activist investor Elliott has acquired a stake of over USD $1 billion in the athletic apparel company.
Redwire Corporation gained 9% after the space technology company announced an eight-figure deal with European aerospace firm The Exploration Company (TEC) to provide advanced docking systems for spacecraft.
Yardeni Research Questions ‘Santa Claus Rally’
Yardeni Research informed investors in a note on Thursday that the traditional year-end “Santa Claus rally” may be harder to sustain as investors shift away from the “Magnificent Seven” stocks and toward the broader market.
The firm declared “Mission Accomplished” regarding its year-end target of 4,700 points for the S&P 500, after the index reached a record 4,901 points on December 11, adding that this level “could be the high for the year.”
While Yardeni stated it “doesn’t rule out a Santa Claus rally for the rest of the year,” it cautioned that such a move is “unlikely to occur if the S&P 500 continues to rotate away from the Magnificent 7 toward the Impressive 493,” (a term coined to refer to the remaining companies in the S&P 500, as the firm predicts).
Strategists argued that the Magnificent 7 may be entering a correction similar to the DeepSeek episode earlier this year, as investors grow increasingly concerned about the high investment in AI that is “draining the cash flows of the Magnificent 7 and slowing earnings growth.” Prior to AI, the group generated strong cash flow due to relatively low investment in labor and capital, but that dynamic has shifted with intensifying competition.
The firm noted that the market capitalization of the Magnificent 7 has doubled to USD $20 trillion over the past two years and now represents 31.7% of the S&P 500. In contrast, the “Impressive 493” trade at much lower valuations.
