We’re back and starting to enter the final trading days of 2024. The last couple of weeks of ample data and analytics allowed us to feel comfortable in our outlook for the remainder of the year.
We at Cornerstone currently see four positive catalysts going into year end, with the S&P 500* chugging higher towards our recently updated target of 6,300.
First, there’s an 83% probability of a seasonally strong December:
Since 1950, when the S&P 500 is up over 10% in the first half of the year and it's also an election year, the median December return is 3.4%, with a hit ratio of 100% of the time.
Next, yields on 10-year Treasurys have declined to pre-election levels after the unnecessary freakout from talking heads in early November:
We’ll circle back to interest rates soon.
Third, American Association of Individual Investors sentiment has now turned cautious or bearish, which is an extraordinarily contrarian positive indicator:
As you may recall from past posts, retail individual investors are significantly more wrong than they are right when compared to “big money” institutional investors. There's a significant disconnect between American individual investor sentiment and what “big money” has been doing since the week of Thanksgiving.
Why is this positive? Well, stocks are up in the face of negative retail sentiment because “big money” is doing the opposite of retail. We’ll circle back to this topic later as well.
Lastly, the “Federal Reserve put” and the “Trump put” together mean there’s a buy-any-dip sentiment. What do we mean by the “Trump put?”
The drivers behind the “Trump put” are deregulation, a declining cost of capital for businesses in general, and overall animal spirits. These are all reflected clearly in the top current sectors, which are all cyclical growth sectors:
To be clear, this is purely analysis regarding future policy being friendly to business. Those circled sectors benefit from things like deregulation and lower interest rates.
Taken together along with what we’ll discuss below, there’s a clear path to the year-end mark of 6,300 for the S&P 500 – but there’s a caveat. A few near-term headwinds could create a short zone of hesitation over the next week or so with key data reports being released:
More data that conflicts with retail investor sentiment is the fact that the third quarter earnings season for 2024 is nearly done. This time around, 77% of S&P 500 companies beat consensus earnings expectations, with a blended earnings growth rate of 5.8%. It’s the fifth consecutive quarter of year-over-year earnings growth.
Earnings season has been largely positive, showing the continued strength of the U.S. economy and businesses.
Obviously, earnings are an important fundamental. So, we wanted to turn to the red herring the news media has been promulgating as the biggest risk factor for the markets going back to late October: our all-time favorite, yet most boring area – the bond market.
To close our November, U.S. Treasurys finally had a great week of higher prices and lower yields that reversed October and early November’s sharp selloff. Prior to October, the Treasury market enjoyed five months straight of gains, taking the benchmark 10-year yield down to 3.6%. Then selling pressure took over amid a series of resilient economic data reports that sharply dialed back “expectations” for more steep rate cuts from the Fed.
In late October, expectations for another half-point cut in the federal funds rate collapsed, leaving bond traders on alert. But then the renewed holiday spirit finished November on a high note.
Lower long-term bond yields were squarely tied to the latest set of inflation data coming in at forecasted levels. They were then supercharged by President-elect Trump's choice of Scott Bessent as Treasury Secretary. He is considered a moderate choice and someone who may temper some tariff-related risks. He could also take aim at the budget deficit, which raised investor confidence about the economic outlook and government fiscal discipline.
As a result of these developments, the 10-year bond yield quickly declined from 4.5% on Nov. 15, to close out the month at 4.18% in strong fashion:
This is a powerful move. It’s as if the Dow Jones Industrial Average# increased by 2,000-3,000 points (or 5%-7%) in one week:
Furthermore, this would also be the equivalent of the S&P 500 increasing by 300-425 points in a week, which alone would bring the fair market value of the index to between 6,384 and 6,509 as we sit here today:
The sharp rally in bond prices is like a rocket booster for further stock market gains. But let's be conservative. Even if the bond market takes a rest and just trades sideways into the end of the year, the case for a future rally in equities is also driven by the S&P 500’s higher expected earnings growth.
According to FactSet, the S&P 500’s estimated fourth-quarter earnings growth rate is 12%, doubling the 5.8% gains of the outstanding third quarter earnings:
That would be the highest year-over-year earnings growth rate reported since 2021.
Drilling down, eight of the 11 sectors are predicted to report year-over-year earnings growth in the fourth quarter and six of those eight sectors are expected to report double-digit earnings growth:
Few in the trustworthy financial media are talking up this sharply higher fourth quarter earnings story that is already unfolding and will become apparent starting in mid-January. This is where the disconnect between retail and “big money” investors lies time and time again.
The “big money” is already telling us what to expect going into next year due to the strength of the underlying fundamental data. MAPsignals’ trusty Big Money Index (BMI), a 25-day moving average of “big money” buys and sells, is rising after a period of volatility:
Let's investigate selling a little more. While buying is historically more important, the amount of selling relative to all signals matters too. So, let's focus on any destruction under the surface.
Keep in mind the 34-year average of selling is 39%. Today's value is 32% and falling:
In that chart above, the closer the line gets to 0, the higher stocks go. The institutional trend here is our friend.
Once again, “big money” is ahead of retail sentiment. And when the buzz around fourth-quarter earnings takes hold, it will sound like this famous ancient Christmas poem:
Investors were nestled all snug in their beds,
While visions of stock splits danced in their heads,
When out on Wall Street there arose such a clatter,
That we ran to our screens to see what was the matter.
That “clatter” on our computer screens will be the bullish pre-announcement season during the next four weeks that very well may kick off an early Santa Claus rally that will deliver a joyful holiday season.
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*Past performance does not guarantee future results.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# The Dow Jones Industrial Average is a stock index tracking 30 large, American, publicly owned blue-chip companies and is generally considered representative of the broader U.S. economy.
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