As we begin to settle into the last month of the year, the market momentum and underlying data is now continuing to support a path for the S&P 500* to finish 2025 achieving new all-time highs, reaching 7,000 or higher.
What might have been the last possible hurdle to throw a potential wet blanket on this momentum came without any issues last Wednesday, when Federal Reserve Chair Jerome Powell announced a 25-basis-point cut to the federal funds rate. This created a “market clearing” event, allowing markets to now solely focus on the positive seasonals and six other fundamental reasons we at Cornerstone see for a December rally:
- The Fed made its December cut and quantitative tightening ended on Dec. 1.
- Overall, U.S. economic data remains healthy and includes indicators of pent-up demand exist.
- The government shutdown is over, which restored economic data visibility.
- Many investors were in unenviable positions and gave in during the November selloff and thus now are trying to catch up, further solidifying how 2025 hasn’t been great for many fund managers.
- Equities got oversold in November for no fundamental reason, which creates attractive buying opportunities that are still there today.
- All-important seasonal strength gift brought to us by Santa Claus.
The seasonal strength setup is especially favorable from a historical perspective this year:
Circling back to the Fed’s announcement, the market not only reacted positively to the rate cut but also to the federal funds futures dot plot. That metric indicated an expectation of further cuts throughout next year:
Last week's market reaction was especially bullish when comparing the 0.7% S&P 500 jump post the FOMC press conference when compared to the previous four announcements. In those cases, the market finished either negative or flat in response Chair Powell’s commentary:
As mentioned above, last week’s reaction sets the table for seasonal tailwinds to pick up speed following the passing of the mid-November storms:
After another week of analyzing underlying fundamental data, it’s become even clearer the V-shaped bottom we referenced last week has clearly taken shape, starting on Nov. 21. Since then, pressure from forced liquidations has subsided as buyers have stepped in, quickly evaporating any negative market pressure.
To illustrate the speed and magnitude of this V-shaped bounce, let’s compare buying and selling from two distinct periods. The first is the end of October up to Nov. 20, a time that saw more outflows than inflows:
In the chart above, just three of the 17 trading days saw more buying than selling.
Now look at the nearly inverse action from Nov. 21 through the end of last week:
Selling abruptly vanished and buyers have fully taken control.
Taking a step back, this quick and sharp reversal created a floor for MoneyFlows’ trusty Big Money Index (BMI), which is a 25-day moving average of institutional investor activity. The BMI quickly bounced from its 40% lows all the way up to 59.5%, as of this writing:
Digging another layer down, the growth cyclical trade is further supported by significant inflows into small- and mid-cap stocks since the bottom on Nov. 21. Overall, during this time there was over a three-to-one ratio of inflows to outflows across stocks of all sizes:
If we compare these two periods from a sector basis, it’s interesting how growth sectors like technology, discretionary, industrials, and financials were the top sold sectors from Oct. 28 – Nov. 19:
Since the market’s V-shaped pattern, cyclicals like technology, industrials, financials, and discretionary once again became inflow leaders:
In short, the good news is the tailwinds have re-emerged and they’re supported by sound fundamentals, like excellent earnings. At least temporarily, we think this creates a bullish, optimistic outlook for the market going into the first half of the year.
Now, as tiny teaser to our upcoming market outlook blog posts, let’s talk about next year. While things are lining up for a good start, there’s an important caveat to cover: midterm elections. They’re a historical headwind.
Midterm elections tend to bring uncertainty for markets, as you can see in the chart below. In terms of equity performance, midterm years are the softest in presidential cycles.
But let's remember how the market just shook off a sharp, temporary liquidation and quickly recovered. Even better, there’s every indication it will strengthen going into the new year.
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