The November stock market rally has been convincing—so much so that we are now convinced that the S&P 500 index can hit a record high by the end of the year.
The S&P 500 gained 2.2% this past week, while the Dow Jones Industrial Average advanced 1.9% and the Nasdaq Composite rose 2.4%. Much of the lift came on Tuesday, when October’s consumer price index came in lower than expected, solidifying the thesis that the Federal Reserve will stop raising interest rates.
The CPI reading was that good. The headline number was little changed from the month before, while core CPI, which excludes volatile food and energy, rose 0.2%, below expectations for 0.3%. Together, it was one more sign that the Fed is winning the battle against inflation. Chances of an interest-rate hike in December have fallen to just 0.2%, according to the CME FedWatch Tool, which also shows a 28% chance of a cut in March. The S&P 500 has now advanced 10% over the past three weeks, its largest three-week gain since 2020.
This rally is one to believe in. The S&P 500, at 4514, has now broken above key levels and isn’t showing any signs of backing off. It has cracked every important level as it has risen from its recent low, and now just one remains in its way: 4520. The index has run into resistance around that level before, and it’s struggling to break through it now. Still, the fact that it hasn’t dropped means that market participants are optimistic enough to continue buying stocks.
If the S&P 500 breaks through 4520, then it should be off to the races. Its momentum could easily bring the index back to its intraday high for the year at 4607, hit at the end of July, which is only 2.1% away. From there, it could well reach its all-time intraday high of 4818, hit in January 2022. Seasonality should provide a boost, too, with stocks averaging a 1.5% gain in December since 1950.
“The setup is there to make a run at that peak,” says Jay Woods, chief global strategist at Freedom Capital Markets. “There’s too much momentum, too much fear of missing out.”
Some obstacles, though, are more than technical. It’s no coincidence that the S&P 500 and the iShares 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) have both risen this past week, a sign that yields will have to remain where they are or move lower for the index to continue its move higher. Economic data have been slowing enough to keep yields near where they are, argues 22V Research founder Dennis DeBusschere. “10-year yields should remain around current levels as long as estimated GDP growth is around current levels,” he writes.
If the economy grows, so can corporate sales. Analysts expect revenue at S&P 500 companies to grow at a 5.1% annual rate over the next couple of years, per FactSet.
The cost of materials and salaries, meanwhile, should grow at a slower rate, helping companies increase profit margins and leaving more cash to buy back shares. Earnings per share are expected to grow at a 12% clip over the next two years. That forecast may feel too good to be true—and it may turn out to be—but that’s a next-year problem.
For now, enjoy the upside.
Write to Jacob Sonenshine at [email protected]
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