NEW YORK, Nov 17 (Reuters) – Are U.S. stocks poised for another dramatic rally, or are there a lull in sight? That’s the question investors are asking as the S&P 500 heads toward the end of the year with a new all-time high in sight.
Signs that inflation is calming raise expectations that the U.S. Federal Reserve will complete its interest rate hike, prolonging the rally in the S&P 500 (.SPX), which has risen more than 9% since late October. This was a contributing factor. The index has risen 17% since the beginning of the year and is up about 6% from its all-time high close since January 2022.
Whether that level can be reached in the coming weeks will depend on how confident investors are that the U.S. economy is on track for a so-called soft landing, meaning the Fed is on track to rein in inflation without significantly damaging growth. Partially dependent. So far, the economy has proven resilient in the face of tight monetary policy, although some indicators of employment and consumer demand have softened.
Rising valuations and still-high U.S. Treasury yields are another hurdle. However, other factors, such as past seasonal trends, could support further increases.
“We are currently balancing a weakening outlook for inflation with an improving interest rate trajectory, alongside a slowing economy,” said Yunyou Ma, chief investment officer at BMO Wealth Management.
Investor optimism for stocks has grown in recent weeks as the market recovered from months of decline that lasted from August through most of October. Equity exposure by active investment managers rose from a one-year low hit last month to its highest level since August, according to the National Association of Active Investment Managers’ Exposure Index.
U.S. stock funds posted net inflows of about $9.33 billion in the week ending Nov. 15, the largest weekly net purchases since Sept. 13, according to LSEG data.
U.S. Treasury yields, which have been steadily rising over the past few months and have been weighing on stock prices, are rapidly receding. The yield on the benchmark 10-year U.S. Treasury note stood at 4.43% early Friday, up from a 16-year high of just over 5% last month. Yields move inversely to bond prices.
Analysts at Ned Davis Research, which recommends overweight stocks, said this week that investors should shift further away from bonds and toward stocks. A key factor is that the Fed is unlikely to need to raise rates further after October consumer price data released earlier this week was weaker than expected.
“Investors are wondering whether the Fed can pull off a soft landing,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “The CPI report supports the view that the tightening cycle is over and the mantra of higher long-term interest rates may not last as long as previously feared.”
Robert Pavlik, senior portfolio manager at Dakota Wealth, said many investors’ concerns have been addressed, including concerns about third-quarter results that were better than expected.
Pavlik, who is “fully invested” in his stock portfolio, said that “both individual and institutional portfolio managers will recognize that stocks are the place to be between now and the end of the year.” .
Seasonality also favors stocks, with November and December posting the second and third largest monthly returns of the year since 1950, with average gains of 1.5% and 1.4%, according to the Stock Traders Almanac. did.
The stock market will face a number of challenges next week. Chip giant Nvidia (NVDA.O) will report its quarterly results on Tuesday, marking the start of this earnings season from the giant companies known as the Magnificent Seven, whose huge stock gains have led to this year’s stock index rally. This is the final report.
The health of the consumer-driven economy is revealed on Black Friday, the day after Thanksgiving, the traditional start of the U.S. holiday shopping season. U.S. retail sales fell in October for the first time in seven months, data showed on Wednesday.
One cause for concern is that stock valuations are rising again. According to LSEG Datastream, the S&P 500 index is trading at 18.7 times expected 12-month earnings, the highest level in about two months and well above the long-term average of 15.6 times.
Jason Pride, head of investment strategy and research at Glenmede, said the firm is underweight stocks and has a larger than usual allocation to cash and short-term bonds.
“Interest rates remain high enough and financial conditions remain sufficiently tight that the near-term outlook is concerning and probably does not justify high valuations,” he said.
Keith Lerner, co-chief investment officer at Trust Advisory Services, said the recent surge in stock prices means “the bar for positive surprises is also getting higher,” adding to his stock position on a pullback. This is recommended.
“It would be quite normal for stocks to take a breather here,” he said.
(This article has been amended to change U.S. retail sales data release date to Wednesday in paragraph 15)
Report by Lewis Krauskopf. Edited by Ira Iosebashvili and Nick Zieminski
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