The Stock Market Barrels Into Year-end With Momentum. What Does That Mean for December and Beyond?

As November progresses, the U.S. stock market appears poised for a robust rally, barring unforeseen challenges post-Thanksgiving. Analysts, including Michael Arone, Chief Investment Strategist at State Street, express optimism about a strong final six weeks of 2023, expecting the market to capitalize on its current momentum into the year-end.

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Several factors contribute to this positive outlook, such as a expanding economy, improving earnings, a resilient consumer base, moderating inflation, and the belief that the Federal Reserve has completed its interest rate hikes. Although acknowledging the market's technical overbought status, analysts find the overall setup encouraging, foreseeing potential near-term consolidation.

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The S&P 500 has already gained over 18% year-to-date, and historical data indicates that when the benchmark registers at least a 15% gain through November, there is a high likelihood (76.7%) of further increases in December. The median gain in such scenarios has been 2%, according to Ned Davis Research.

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Notably, the 2023 rally has been marked by unique characteristics, particularly narrow leadership. Mega-cap tech stocks, often referred to as the "Magnificent Seven" and a select few others, have been the primary contributors to gains, resulting in historically low market breadth. The top 10 stocks in the tech sector now account for 35% of the S&P 500 market cap.

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Despite concerns about the concentrated reliance on big-cap tech, analysts find reasons for optimism, especially regarding potential end-of-year portfolio adjustments by active fund managers. High-performing stocks like Nvidia Corp. could benefit from such window dressing practices.

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However, analysts caution against chasing big-cap winners at their current elevated valuations. Instead, attention is drawn to signs of life in previously overlooked areas of the market. For instance, the iShares MSCI EAFE ETF, tracking companies in Europe, Australia, Asia, and the Far East, has shown an 8.4% gain in November. Small-caps, which lagged in 2023, are also exhibiting signs of recovery.

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Investors, being somewhat opportunistic, are diversifying their focus, indicating overall optimism about the equity market's resilience. The improvement in market breadth is evident, with 58% of the S&P 500 stocks trading above their 200-day moving averages, a level not seen in nearly two months, according to Rosenberg Research.

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While the S&P 500 closed just 0.7% below its 2023 high, optimism is tempered by concerns about potential headwinds in the coming months. The Federal Reserve's previously implemented tightening measures may still impact the economy, and fiscal stimulus effects are expected to wane. Despite these considerations, economic data remains resilient, with the Atlanta Fed's GDPNow model projecting annualized growth of 2.1% in the fourth quarter.

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Analysts, including Arone, anticipate a rockier path for stock market gains in the coming months. The lagged effects of previous rate hikes and the diminishing impact of fiscal stimulus may pose challenges. Moreover, the market's response to third-quarter earnings results suggests heightened expectations, with investors showing less enthusiasm for beats and punishing misses more severely.

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As analysts project around 12% growth in S&P 500 earnings for 2024, there is a growing sense that meeting these expectations may become increasingly challenging, setting a high bar for companies to satisfy investors. The potential for a shift in sentiment remains, but with economic indicators holding steady, a softer landing scenario appears unlikely in the near term.

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