Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.
Ever wondered how Santa manages to buy all those gifts each year? Well, it turns out he might just be tapping into the stock market!
Each year-end, a phenomenon known as the Santa rally takes over the U.S. markets, with stocks typically soaring during the final week of December and carrying that momentum into the new year. This trend has occurred 34 times in the past 45 years.
But with the U.S. elections results still fresh, the big question is: Will the rally continue this year, or will the market take a downturn instead?
1. Merry Markets: S&P 500’s Festive Surge
This November, the S&P 500 has skyrocketed to all-time highs, leaving investors wondering: What’s driving this explosive growth, and can it hold steady?
A combination of powerful factors — from surging tech stocks to unexpected economic resilience — has propelled the rally, but questions loom about its sustainability.
As we approach year-end, market watchers are eyeing key trends and potential risks that could shape the future of this remarkable run.
1.1 What’s Fueling the Santa Swells?
The November rally is being powered by a combination of factors, with post-election optimism playing a central role. Key developments include:
1.1.1 Earnings Strength
The S&P 500’s Q3 earnings per share grew 8% year-over-year, far exceeding the anticipated 3% growth. This trend of surpassing low expectations is likely to persist, providing a solid foundation for continued market performance.
1.1.2 Corporate Buybacks
Companies are repurchasing their own shares at unprecedented levels, with an average of $6 billion being bought back daily.
Goldman Sachs estimates total buybacks could surpass $1 trillion this year, potentially making 2024 the biggest or second-biggest year for buybacks in history.
Seasonality suggests this trend will gain further momentum into December.
1.1.3 Retail Investor Comeback
Retail investors, who were largely on the sidelines earlier in 2024, are now actively participating. This is evident in the increase of smaller trades, typically under 100 shares, which signal retail activity. Historically, retail investors tend to remain engaged for extended periods, suggesting sustained buying pressure.
1.2 Will the Santa Rally Deliver Through Year-End
The Santa Rally appears set to shine brightly through year-end, with projections placing the S&P 500 on track to hit a year-end target of 6,300. This rally, traditionally fueled by optimism and favorable market conditions, is gaining strength from several key factors that suggest a broadening and more sustainable upward trend.
Improved market breadth is a significant driver, as gains are no longer confined to tech giants like the “Magnificent 7”. Instead, mid- and small-cap stocks are joining the surge, creating a more inclusive market dynamic.
Institutional investors are making strategic shifts, moving beyond their heavy allocation to mega-cap tech stocks and exploring opportunities in sectors like financials and smaller-cap companies. These areas, often overlooked during previous rallies, are now drawing increased attention for their growth potential. Furthermore, the rise in interest toward equal-weighted indices reflects a healthier balance in market participation, reducing the reliance on a few dominant players to sustain upward momentum.
Despite the market trading near 22x price-to-earnings (P/E) ratio, concerns about overvaluation are tempered by strong earnings growth and economic data that consistently outperform expectations. As consumer spending remains resilient and inflation shows signs of moderation, the economic backdrop supports these valuations. If these trends persist, the Santa Rally could maintain its strength and deliver the anticipated gains, providing investors with a prosperous close to the year.
1.3 Sectors Sleighing the Stock Market
Goldman Sachs has identified key sectors and themes that are drawing substantial investor interest as we move through the latter part of 2024. These trends reflect shifting market dynamics, with investors looking to position themselves for growth opportunities across diverse areas.
1.3.1 Financials
Under-owned for much of 2024, financial stocks are seeing increased attention from hedge funds and mutual funds. Banks with M&A exposure, particularly smaller-cap players, are experiencing robust buying activity. A few notable finance sector stocks include:
- Independent Bank Corporation (NASDAQ: IBCP) Five Star Bancorp (NASDAQ: FSBC)
- PacWest Bancorp (NASDAQ:PACW)
- Customers Bancorp, Inc. (NYSE:CUBI)
- Western Alliance Bancorporation (NYSE:WAL)
1.3.2 Energy
Traditional energy stocks, especially those tied to oil, remain in high demand as investors seek exposure to this resilient sector. A few notable energy sector stocks include:
- Bloom Energy Corp (NYSE: BE)
- Exxon Mobil Corporation (NYSE:XOM)
- Chevron Corporation (NYSE:CVX)
- Halliburton Company (NYSE:HAL)
1.3.3 Small Business Exposure
Companies tied to the broader U.S. economy, particularly those serving small businesses, are emerging as strong contenders for growth. A few notable small business stocks include:
- AvePoint, Inc. (NASDAQ: AVPT)
- Intuit Inc. (NASDAQ:INTU)
- Block, Inc. (NYSE:SQ)
- Fiserv, Inc. (NASDAQ:FISV)
1.3.4 Global Infrastructure
Outside the U.S., European infrastructure companies linked to the rebuilding of Ukraine are becoming attractive opportunities, offering a unique theme for global investors. A few notable global infrastructure stocks include:
- Veolia Environnement (NYSE:VE)
- CRH Plc (NYSE:CRH)
1.4 Risks to Watch: Rates and Inflation
Amid the holiday cheer, risks still linger that could disrupt market momentum. A primary concern is the potential for rising interest rates, with the 10-year Treasury yield under close scrutiny. A sudden spike to 4.6% before the end of November could unsettle equity markets, while a more gradual rise would likely have a milder impact.
Inflationary pressures also pose a challenge, fueled by factors such as tariffs and growing deficit concerns. These could complicate the outlook for interest rates, adding uncertainty to the market’s trajectory.
A pivotal moment will be the release of the non-farm payrolls report on December 6th. A weaker-than-expected print could strengthen expectations for additional Federal Reserve rate cuts later in December, aligning with market hopes for continued support. Investors should stay vigilant, as these factors could shape the remainder of the year for equities.
(This article was originally written on Nov 30, 2024)
