Footsie's Santa rally underscores two-tier economy, McRae says

London stocks extended the Santa rally in December, with the FTSE 100 up more than 300 points over the past month, roughly 3.5%. Some traders say the index could nudge through 10,000 by year’s end if the momentum persists, a milestone that would reflect optimism about global growth and available liquidity.

The lift has been closely linked to strength in the United States, where a broad rally in major indices has drawn money across the Atlantic. In London, trading sessions have often shown a pattern: flat in the morning, then a late lift after Wall Street opens higher. The practical takeaway for investors is that the near-term mood is tethered to overseas equity performance, even as conditions at home remain uneven.

The pressurized domestic backdrop remains a central part of the story. Analysts describe the economy as two-tier: the stock market’s buoyancy is powered by large, globally oriented firms that export to world markets, while many smaller and medium-sized enterprises face weak domestic demand and ongoing employment cutbacks. If the smaller firms falter, the social and economic costs could be significant despite any gains for the big players.

Looking ahead, the consensus among major investment banks is cautiously constructive. JP Morgan projects double-digit gains across major markets, while Goldman Sachs envisions a broader bull market driven by higher earnings across a wider array of companies, not just AI leaders. The Street’s central expectation for the benchmark S&P 500 is about an 11% rise, down from roughly 16% this year, but still comfortably ahead of inflation. A counterpoint exists, however: Warren Buffett has flagged caution, and Jamie Dimon has signaled a similar stance. Michael Burry, famed for predicting the 2008 crash, has warned of an AI bubble and has described Bitcoin as worthless. Despite these cautions, it is rare to find a major institution forecasting a broad market crash.

These forecasts feed into a broadly positive tone for London equities, with many analysts penciling in a test of 10,000 in the coming weeks and a 2026 year-end around 10,800. The optimism about equities sits in contrast to a more fragile domestic output picture, where growth has been elusive for six months and the private sector has contracted in real terms. Any improvement in share prices would reflect expectations that the global economy can sustain expansion, benefiting the exporters and global service providers that dominate the Footsie.

The domestic weakness matters for the broader economy because the majority of private-sector jobs are tied to small and medium-sized enterprises. If the SME segment continues to shed labor, the social consequences could be substantial even as blue-chip companies prosper on the international stage. In the near term, investors will be watching for signals on consumer spending, inflation, and the direction of monetary policy as central banks balance the need for monetary accommodation with the risk of overheating.

In sum, the Santa rally may be sustaining a two-tier narrative: confidence is supported by strong global growth signals and robust earnings in large, traded companies, but domestic weakness persists and threatens to limit upside for smaller players. Market participants will need to weigh the resilience of global demand against the slower pace of domestic recovery as they map out investment strategies for 2025 turning into 2026.