U.S. Stock Rally Continues

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – A relentless rally in U.S. stocks is showing few signs of slowing as year-end approaches, despite rising valuations and concerns of excessive speculation suggesting a correction may be overdue.

The S&P 500 achieved its 57th record close of the year on Friday, up nearly 28% in 2024 due to a robust U.S. economy, expectations of lower interest rates, and enthusiasm over tax cuts and deregulation promised by President-elect Donald Trump.

Strong momentum has characterized the rally, with the S&P 500 not straying 10% or more from its record high for over 13 months, the longest streak in nearly three years. Historically, such corrections average once per year, according to data from BofA Global Research.

> “Momentum is the factor that is driving the market,” said Steve Sosnick, chief strategist at Interactive Brokers. “The market right now is basically a freight train and nobody really wants to get in its way.”

Betting against a strong market has been risky; the S&P 500 has logged back-to-back annual gains of 20% or more five times since 1928. In each instance, it was higher three months later, with an average gain of 6.3%, per a Reuters analysis.

> “Momentum begets momentum,” said Sonu Varghese, global macro strategist at Carson Group, adding, “You don't want to fight the tape.”

Nevertheless, even staunch bulls are questioning the sustainability of the rise. Bank of America’s Michael Hartnett stated that the S&P 500’s valuation at 5.3 times price to book value exceeds its March 2000 peak, raising concerns about an “overshoot” in Q1 2025.

Ed Yardeni, founder of Yardeni Research, cited various indicators showing bullish sentiment, such as the November Consumer Confidence Index, where a record 56.4% of consumers expect stocks to rise in the next 12 months. Yet, extreme sentiment can be a contrarian indicator, suggesting that too many investors may be overcommitted to bullish positions.

Lori Calvasina, head of U.S. equity research at RBC, expressed growing concern over high valuations making the S&P 500 vulnerable to a 5% to 10% pullback. Currently trading at 22.6 times forward earnings, this is significantly above the historical average of 15.77.

For now, broader markets show little indication of distress. The Cboe Volatility Index (VIX), which measures investor demand for protection from swings, slumped to a near five-month low of 12.75, suggesting continued market stability.

Historically, December yields strong performance, with an average gain of around 1.6%. The S&P 500 finishes higher 74% of the time in December, the highest win rate across the calendar year.

While a market reversal is expected eventually, potential triggers may include volatility from Trump’s threats of steep tariffs against trading partners. Strategists warn that a full-blown trade war could negate the benefits of tax cuts and deregulation.

Despite concerns, many investors remain committed to their positions. Mark Newton, head of technical strategy at Fundstrat Global Advisors, believes current overbought conditions are not a sufficient reason to exit stocks. “I just have a difficult time selling the equity market here,” Newton commented.