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US stocks rule as bull market bets highlight 'American exceptionalism'
U.S. stocks are riding into the final trading week of the year on a high note, with investors shrugging off a recent wobble in the bond market to further cement the case for what analysts describe as American exceptionalism and to set the stage for an extended bull run into 2025.
Bond markets attempted to spoil the stock market Christmas party last week, with yields rising the most in more than a year amid hotter-than-expected inflation data, solid GDP growth estimates and ongoing concern tied to the government's weakening finances.
The latter factor was crystallized by data showing a record budget deficit of $624 billion over the first two months of the U.S. fiscal year, which began in October. That level suggests the government would need to borrow around $10 billion each day to balance its books.
Global investors, while marking U.S. Treasury yields higher as a result, still took down massive swathes of three key bond auctions last week. That decision suggests that while they may demand a modestly higher premium to loan longer-term money to the U.S. government, buyers are showing no sign of calling a strike in the bond market.
At the same time, stock investors were also demonstrating their own version of American exceptionalism. Data from Goldman Sachs indicated that around $186 billion in new funds have ploughed their way into domestic equity funds in the nine weeks since Election Day, an all-time high that tops the previous record, set in 2021, by around $42 billion.
Stocks are hot, but they're not cheap
U.S. stocks in fact are now by nearly every measure the only game in town when it comes to global equities, with domestic indexes comprising around 65% of the world's market value, another all-time peak. Japan, the second-largest allocation, accounts for only around 5%.
"U.S. strength remains undiminished, upheld by strong consumers and robust corporate balance sheets," said Seema Shah, chief global strategist at Principal Asset Management.
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"This starkly contrasts European and Chinese weakness, which has continued to linger, despite policymakers stepping up stimulus measures," she added.
"Next year, the macro backdrop will likely look like 2024, with U.S. outperformance still intact and the rest of the world attempting to navigate the obstacles that U.S. economic and political strength lays out for the global economy."
That dominance, however, doesn't come cheap; on a forward-profit basis, U.S. stocks are trading at a price-to-earnings multiple of 22 times. That's around 10 points higher than their global peers and the biggest gap in market history.
Santa rides a bull into 2025 stock market
Still, Wall Street analysts and, it seems, everyone else expects the current bull market to extend into both the second half of December and well into 2025, powered by improving corporate profits, a business-friendly new White House administration, and a resilient domestic economy.
Wall Street's median end-2025 price target for the S&P 500 is now at around 6,600 points, with a high of 7,100 from Oppenheimer's John Stolzfus and a low of 4,450 points from BCA Research's Peter Berezin.
“My SPX 5K hat has been retired, my SPX 6K hat is tossed, and my SPX 7K has been ordered,” said Scott Rubner, Goldman Sachs technical strategist.
Chris Larkin, managing director for trading and investing at E-Trade from Morgan Stanley, notes that December gains for the benchmark, which is up 0.31% so far this month, tend to come over the final two weeks of the year.
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"The S&P 500 had a positive net return in this period 78% of the time since 1957," he said.
Jason Pride and Michael Reynolds, respectively chief of investment strategy and research and vice president of investment strategy at Glenmede, argue that we're in the early phase of the current bull market, which effectively began in October 2022.
" While the current boom from 2022 to present has seemed quite extraordinary, it has been the second shortest bull market, with the second smallest cumulative gains, since 1928," the pair wrote.
"Historically, bull markets that were both late-cycle and had premium valuations at the two-year mark lasted on average 38 months, with a 26- to 50-month range," they added.
"The combination of a young bull market, a late-cycle expansion and premium valuations justifies a neutral risk posture given the relatively balanced implications for risk assets."
Some analysts take more cautious stand on stocks
However, Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, is slightly more cautious, noting that while stocks have "surged on exuberance about perceived pro-growth policies in Washington" since the election, "analysts keep reducing their earnings forecasts and economists have halved" their 2025 [Federal Reserve interest rate cut projections.
Rate traders, in fact, suggest this week's expected rate cut from the Federal Reserve, which would take the Federal Funds Rate a quarter-point lower to between 4.25% and 4.5%, could be the last for a while.
CME Group's FedWatch is pricing in only two quarter-point cuts for next year, down from as many as four just a few months ago, as investors await the Fed's new Summary of Economic Projections for the coming year.
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"We believe that post-election euphoria will likely normalize, growth will gradually slow to a soft landing and profits will disappoint, favoring bonds over stocks on a risk-adjusted basis," Shalett cautioned.
Greg Daco, chief economist at EY, also says the U.S. outlook is a bit more circumspect than markets are currently pricing for.
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"The US economy remains on a solid growth trajectory supported by healthy employment and income growth, robust consumer spending, and strong productivity momentum that is helping tame inflationary pressures," he said.
"Still, the outlook is clouded by unusually high uncertainty surrounding regulatory, immigration, trade and tax policy.”
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