NEW YORK, Dec 9 (Reuters) – A record-setting charge in the U.S. markets continues unabated as investors shrug off higher share prices and signs of speculation that some feel is bordering on reckless. The S&P 500 closed at a record high for the 57th time on Friday and is 27.7% higher in 2024 so far, helped by the strong economy, expectations of further rate cuts and optimism over the tax cuts and deregulation to be implemented by the President-elect Donald Trump.
Sustained velocity has been another characteristic of the rally. S&P 500 has not moved more than 10% away from its record high for 13 months, longest such stretch in nearly three years. The average correction of 10% or more was seen once per year, according to the data from BofA Global Research.
“The one thing that is pushing the market at the moment is momentum,” said Steve Sosnick, chief strategist at Interactive Brokers. “The market right now is basically a freight train and no one really wants to get in the way.”
Betting against a market in a strong uptrend has historically been risky: The S&P 500 has recorded 20% plus gains consecutively five times since 1928 and has been higher three months later in each case, with an average of 6.3% gain, data compiled by LSEG and analysed by Reuters showed. The index was up 24.2% last year.
“You get what you pay for,” said Sonu Varghese, global macro strategist at Carson Group, who is overweight equities.
However, even the most enthusiastic bulls are beginning to wonder if stock may be due for a pullback.
Bank of America’s Michael Hartnett said on Friday the S&P 500 was trading at 5.3 times price to book value, its highest since March 2000, and cautioned there was a risk of an “overshoot” in the first quarter of 2025. He also acknowledged signs of “froth” in the wider markets, including the post-election rally that pushed bitcoin past $100,000 for the first time ever last week.
The bank wants to see the S&P 500 reach 6,666 next year, some 9 per cent above where it now trades.
Ed Yardeni, founder of Yardeni Research, cited a number of measures that suggest sentiment is skewed to the bullish side, including the record 56.4% of consumers
who, according to the November Consumer Confidence Index, believe that stocks will be higher in the next 12 months.
Extremes in sentiment are often seen as a contrarian indicator because the bar for positive surprises is higher.
“For the here and now, there may be too many charged up bulls,” wrote Yardeni, adding that a near-term pullback would likely be an opportunity for investors to buy on the cheap. Lori Calvasina, head of U.S. equity research at RBC, said in late November that she has become increasingly concerned that crowded investor positioning and elevated valuations have made the S&P 500 vulnerable to a pullback of between 5% and 10%.
The index trades at 22.6 times forward earnings, versus a historical average of 15.77.
So far, there’s not much evidence those concerns are washing over into wider markets. Consider the Cboe Volatility Index (.VIX), opens new tab, which measures investor demand for insurance against market jolts. The measure, which spiked to a four-year high in the violent but short market jolt of August, plummeted to a near five-month low of 12.75 on Friday.
The history of the VIX index suggests that market calm may continue for some time. Once the index closes below the 14 level as it did in late November, it takes an average of 136 trading sessions to climb above the 20 mark – a level associated with moderate levels of market volatility.
Stocks’ historical record of strong December performance may also be boosting investor confidence.
An LPL Financial analysis reported that the S&P 500 generated an average gain of around 1.6% in December and finished the month higher 74% of the time, which is the highest win rate across the calendar.
Of course, a market reversal is bound to occur at some point. One possible catalyst could be volatility fueled by Trump’s threat to slap steep tariffs on U.S. trading partners such as Canada, Mexico and China. Strategists have warned that a full-blown trade war could undo the good of policies such as tax cuts and deregulation.
But many investors are content to sit tight for the time being.
For Mark Newton, head of technical strategy at Fundstrat Global Advisors, short-term ‘overbought conditions’ – technical speak for a market that has risen too far, too fast – is not reason enough in itself to exit stocks.
“I just have a difficult time selling the equity market here,” Newton said.
