(Dec 5): Stocks hit all-time highs as US Federal Reserve (Fed) chair Jerome Powell said the economy is in remarkably good shape. The euro wavered as the French government fell after a no-confidence vote in Parliament.

A rally in big tech drove the S&P 500 to its 56th closing record in 2024. The Nasdaq 100 climbed more than 1%. Nvidia Corp led a gauge of the “Magnificent Seven” megacaps higher, with the group’s surge this year approaching 65%. Salesforce Inc and Marvell Technology Inc soared as their results boosted hopes both companies will keep benefiting from an industrywide boom in artificial intelligence.

Powell also said officials can afford to be cautious as they lower rates towards a neutral level — one that neither stimulates nor holds back the economy. He spoke at the New York Times DealBook Summit in New York. 

“We view this as slightly hawkish — but stopping well short of challenging the market’s growing confidence that a December cut is the base case, which has been our view all along,” said Krishna Guha at Evercore.

One of Powell’s favourite barometers of the economy — the Beige Book — showed economic activity increased slightly in November, and businesses grew more upbeat about demand prospects.

The S&P 500 rose 0.6%. The Nasdaq 100 climbed 1.2%. The Dow Jones Industrial Average added 0.7%.

Treasury 10-year yields declined four basis points to 4.18%. French bond futures held onto earlier gains after far-right leader Marine Le Pen joined a left-wing coalition to topple the government, setting the stage for further political wrangling that has weighed on the nation’s assets for months.

“The current market environment is clearly ‘risk-on’,” said Steve Sosnick at Interactive Brokers. “Yet the evidence shows that someone has been buying insurance against a 10% correction in the S&P 500, even though — or perhaps because — we haven’t seen one in months.”

The “cost to hedge” against a 10% correction is around the highest levels that we have seen in three years, he noted.

To George Smith at LPL Financial, momentum could continue for stocks as December has been a good month for market seasonals. When studying the proportion of positive monthly returns since 1950, December often delivers the highest — around 74%.

Despite the seasonality, Smith doesn’t rule out the possibility of short-term weakness, especially as geopolitical threats have the potential to escalate. Equities may also need to readjust to what may be a slower and shallower Fed rate-cutting cycle than markets are currently pricing in, he noted.

“We remain tactically bullish into year-end given the positive macro environment, earnings growth, and a Fed that remains supportive of markets,” wrote JPMorgan Chase & Co’s Market Intelligence Team led by Andrew Tyler. “It is sensible to play the market’s momentum and see low pullback potential until mid-January,” they said.

To some technical analysts who watch and analyse price moves, and strategists that keep an eye on investor sentiment, the initial rumblings are starting to sound a lot like a stock market that has overheated. 

A Bank of America Corp indicator that tracks sell-side strategists’ average recommendations remains at its highest level since early 2022, in neutral territory, but much closer to a contrarian 'sell' signal than a 'buy'.

“Statistically (and paradoxically), the impact of 2024’s big gains has made the market look riskier for long-term investors, but potentially safer for near-term speculators,” the Leuthold Group’s Doug Ramsey wrote this week. Leuthold’s major trend index (MTI) — which takes into account many different kinds of indicators — remains at a “high neutral,” but all of the indexes in the MTI closed last week with maximum-bullish readings.

All the short-term positioning, rally chasing and mechanical buying flow speaks to an attitude of just running with the market tide. That doesn’t stop the potential for things to change when the calendar flips into 2025.

“To put it simply, and probably no one wants to hear it, but this is not a good set up — investors and speculators alike have been lulled into permabull paradise,” wrote Callum Thomas at Topdown Charts.

Investors have their hopes up for a Santa Claus rally, but a healthy dose of scepticism might be warranted after November’s stellar run-up, according to Callie Cox at Ritholtz Wealth Management.

“The bar for success is now a lot higher for an economy that may still be in flux,” Cox said. “Yields show that expectations have moved a lot over the past two months, yet we haven’t seen any sustained, clear momentum in economic data. Expectations matter, and the job market is under a microscope.”

To Mark Hackett at Nationwide, the sustainability of the market rally will be dependent on the continued resilience of the consumer. One of the best forecasters of consumer spending is the health of the job market.

“Markets continue to be driven by a combination of technical and fundamental factors,” Hackett noted. “The consistency of the rally is demoralising to bears, creating a ‘virtuous circle’ where buying drives further buying. There are questions of sustainability into 2025 given elevated expectations and valuations, but that is unlikely to derail the near-term momentum.”

Appetite for equities has shown no sign of abating this year. The S&P 500 made multiple record highs, surging over 25%, powered by technology shares and a broad preference for US assets. The rally extended after the election of Donald Trump raised hopes of tax cuts and deregulation.

While American equities have persistently outpaced their global peers, BlackRock Investment Institute says that could continue. The US benefits more from “mega forces,” driving corporate earnings, the firm notes. That is supported by a favorable growth outlook plus potential tax cuts and regulatory easing.

“Some valuation measures — whether price-to-earnings ratios or equity risk premiums — look rich relative to history. But they may not tell the full story,” according to BII. “Comparing today’s index to that of the past is like comparing apples to oranges. Plus, valuations tend to matter more for returns over a long-term horizon than in the near term.”

BII said the AI mega force will likely benefit US stocks more and that’s why the firm stays overweight, particularly relative to global peers such as European stocks.

“The upshot: We are risk-on for now, but stay nimble. Key signposts for changing our view include any surge in long-term bond yields or an escalation in trade protectionism,” BII concluded.

Uploaded by Isabelle Francis