Santa Rally Set to Continue

Investing.com — The much-anticipated Santa rally appears poised to persist, driven by a mix of "Goldilocks" economic data, supportive Federal Reserve policies, and encouraging earnings results, according to Sevens Research.

Economic Indicators

Key economic indicators released last week depicted a balanced view of growth and stability:
– The ISM Manufacturing PMI improved, signaling reduced contraction.
– The Services PMI cooled slightly, alleviating fears of overheating.

Meanwhile, the latest jobs report indicated steady labor market growth, adding about 150,000 jobs per month in October and November.

Federal Reserve Policies

The Federal Reserve remains committed to easing monetary policy. Sevens Research stated that commentary from the Fed confirmed the likelihood of a 25-basis-point rate cut in December.

Corporate Earnings

Corporate earnings, especially from the tech and consumer sectors, have further buoyed sentiment with solid results. This combination of growth, declining rates, and stable earnings has propelled the S&P 500 to over 6,000.

Future Challenges

Looking ahead, while there is a "clear path" for the rally into year-end, Sevens cautions that challenges may arise in early 2025. The firm noted, "the optimistic setup has, as usual, been taken to limits by investors."

They point out that elevated valuations (22x forward earnings) hint at potential vulnerabilities due to policy or economic disappointments. Risks include:
– Policy gridlock in Washington
– Geopolitical tensions
– Tariff threats under the incoming Trump administration.

Medium-Term Outlook

Despite these risks, Sevens Research maintains an optimistic medium-term perspective. As long as economic growth persists, rate cuts continue, and corporate performance remains stable, any volatility could present buying opportunities. Cyclical sectors like financials, industrials, and energy are well-positioned to thrive under these dynamics.

Sevens concludes with a caution: "The path to a continued rally into year-end is clear, but at the same time we should all be prepared for 2025 to start with some volatility related to potential policy disappointment, a possibly slower pace of rate cuts in 2025, and geopolitical saber rattling and/or tariff threats."