12/02/2024 Market Strategy
Where to From Here?
After a Strong November for Stocks, Bulls Look for a Santa Claus Rally While Bears Ask, “Is That All There Is?”
Key Takeaways
- With 485 or 97% of the firms in the S&P 500 index having reported earnings thus far, results are showing a robust third quarter. Profits in Q3 overall were up 8.2% from a year earlier on 5.1% revenue growth.
- Eight of the 11 sectors have positive earnings growth, with five at double-digit rates. Three sectors are showing declining earnings, with two (energy and industrials) falling at double-digit rates.
- Last week’s data on the PCE deflator measure of inflation, the Fed’s preferred measure of price pressures, showed stickiness in the inflation gauges. Meanwhile consumer sentiment measures posted gains in November.
- This week brings the ISM surveys and the nonfarm payroll report for November, key indicators of the economy’s momentum in the month just ended.
Stateside equity markets last week saw five widely followed indices close at record highs with the Dow Jones Industrial Average and the S&P 500 closing at their latest all-time highs on Friday after the S&P 400 (mid-cap), S&P 600 (small cap) and the Russell 2000 (small cap) had closed at their respective record highs at the start of the week last Monday.
The NASDAQ Composite (over 40% weighted in tech and tech related stocks) did not join the other indices in posting a record high last week but closed last Friday 1.13% higher than where it had started the week and less than half a percent (0.42%) below its record high posted earlier in the month on November 11.
In our view the powerful rallies stocks have delivered this year illustrate a significant broadening of the rally which began from an October 2023 low and carried forward into and throughout 2024 notwithstanding some views on Wall Street as to whether or not stocks were likely to carry forward with gains from 2023 into and through this year (2024).
As we prepare to enter the New Year in about a month from today, traders and investors ponder whether stocks will continue to rally and whether large cap technology will remain a key component of leadership in carrying stocks higher in 2025 or will it defer to another sector or group of sectors to lead the markets in terms of direction in the months and year ahead.
Valuations remain a concern among market participants with stocks at current levels and with the S&P 500 sectors and a number of other benchmarks showing forward PE multiples that are higher than their five-year averages (see page 12 of this report for valuation comparisons).
That said, the resilience exhibited throughout the year by the economy, business, and the consumer suggests more upside for stock prices is likely notwithstanding a catalyst that could appear and provide opportunity for bears, skeptics and nervous investors to take profits midst a bull market that appears to have legs driven by fundamentals that enable it likely to travel further up the proverbial wall of worry.
Market participants also ponder if midcap and small cap stocks, which have outperformed large cap stocks since Election Day, can sustain their recent ability to outperform or will their performance fade as 2025 gets underway.
Other questions equity investors ponder is the sustainability of the leadership of cyclicals over defensive sectors as well as the sustainability of growth to outperform value.
With the broadening of the rally in equities that has occurred this year showing investor desire for less portfolio sector and market cap concentration and greater portfolio diversification across sectors, market capitalizations, style, cyclicals and defensives we expect economic growth, and corporate revenue and earnings growth are likely to guide investors’ asset class choices as markets move into the New Year.
Don’t Forget to Dance with the One that Brought You
From our perch on the market radar screen information technology, communication services, financials, consumer discretionary, and industrials remain core and favorite sectors particularly among large caps as we position for the year ahead.
Both within and outside the aforementioned five sectors, it’s hard to find a sector among the eleven that doesn’t have companies that can benefit from AI deployment. Execution will be key as to the degree of success individual companies will have of course in this latest watershed period of technological innovation.
With technology deeply embedded in the lives of corporations and the consumer, we expect that AI is likely to remain a core thematic for investors to consider with its potential to drive efficiencies for business, the consumer, government, education, research, and across the sectors, market capitalizations, and styles.
The recent decisive results in the November stateside elections suggests that a more business-friendly administration will have opportunity to pursue policies conducive to economic growth, which benefit business, labor, and consumers.
The Week Ahead
The calendar is set to deliver a brace of economic data that should provide further clarity as to the health of the economy across a broad array of economic gauges including those tied to services, manufacturing, job growth, wage growth, inflation, unemployment, the labor participation rate, and consumer sentiment.
This week and next week will find just a few corporations left to report results in the S&P 500 Q3 earnings season. This week includes several widely followed names in consumer discretionary, staples, and information technology.
With 485 or 97% of the firms in the S&P 500 index having reported earnings thus far, results are showing a robust third quarter. Profits in Q3 overall were up 8.2% from a year earlier on 5.1% revenue growth.
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