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US stocks extended their gains into the holiday-shortened Thanksgiving week and the S&P 500 had its best month of the year. The rally in US stocks has continued even as there are concerns over the trajectory of rate cuts as well as a possible trade war in Donald Trump’s second presidency.
The S&P 500 Index added 1.1% last week and gained 6% during the month. It hit new intraday and closing highs on Friday – so did the Dow Jones Industrial Average Index. Notably, US stocks have rallied handsomely since Trump’s election. The bulk of the action has come in small cap space which was lagging large cap peers until last month. The Russell 2000 rose by double digits last month amid the rally in small-cap shares.
S&P 500 Rose to a New Record on Friday
The S&P 500 is up over 26% for the year and is on track to deliver two consecutive years of over 20% annual returns—something it hadn’t done since the late 90s when US shares rallied amid the dot-com boom.
Meanwhile, some analysts see the rally in US shares heading into December and then further into 2025. According to Ross Mayfield, investment strategist at Baird Private Wealth Management, “The prevailing takeaway from November, to me, is that what was true before the election has remained true after the election.”
He added, “As we head into December, it’s really hard to fade this bull market here, with all the things going right, the election in the rearview and a seasonal tailwind that still has some room to run.”
Evercore ISI believes that the S&P 500 could close 2024 at 6,300, implying gains of over 32% for the year.
Could the US Markets Rally into 2025?
Ned Davis Research sees the rally in US stocks continuing into December. “Big gains tend to be followed by additional gains. … The message is bullish through the end of 2024,” it said in its note.
Meanwhile, many brokerages believe that the S&P 500 will continue to rally into 2025 and Deutsche Bank chief global strategist Binky Chadha set a 2025 target for the index at 7,000 which is the Street-highest and matches the target that Yardeni Research has set.
“For equities, strong equity inflows are partly driven by strong cyclical growth as it impacts views on prospective corporate earnings and equity returns,” said Chadha.
He added, “Inflows have also been driven by rising risk appetite which is currently very elevated. It certainly bears watching but risk appetite in our view should be high with the unemployment rate near 4% and GDP growth at 3%, a rare strong combination that has occurred just 6% of the time historically.”
M&A Activity Expected to Pick Up
Chadha sees a spurt in M&A activity and said, “An unfavorable regulatory regime has also clearly been a drag. A combination of greater corporate confidence and an easier regulatory regime could spark a rebound in M&A and capital markets activity.”
He however believes that there would be a sector rotation and large-cap tech names that have led from the front since last year would take a back seat. Chadha is bullish on financials, materials, and consumer cyclical shares for 2025.
S&P 500 Valuation Is Running Over Historical Levels
Meanwhile, there are concerns over valuations as the S&P 500’s forward PE multiple of 22x is well ahead of historical averages.
In his note, Jefferies strategist Christopher Wood hypothesized that US stocks might peak ahead of Trump’s inauguration next year. “Financial markets can get very extreme at inflection points and it has to be wondered whether such a point is approaching,” said Wood.
He added, “At a time when there is much talk about ‘American exceptionalism,’ it is worth noting that the S&P 500 price to sales ratio is almost back at a record high. America is also now 66.7% of the MSCI All Country World Index which is an all-time high.
Trump’s Tariffs Could Be a Threat
The consensus view seems to be that Trump’s proposed tax cuts and pro-business policies could help spur growth in the US economy and thereby support the rally in the S&P 500.
According to Yardeni Research’s Ed Yardeni, “We’re just seeing a more pro-business administration coming in that undoubtedly will cut taxes.” He added, “And not only for corporations but also for individuals. Lots of various kinds of tax cuts have been discussed. And in addition to that, a lot of deregulation.”
Notably, Trump has set up a Department of Government Efficiency (DOGE) under Elon Musk and Vivek Ramaswamy which would advise him on cutting “wasteful” government spending and ease regulations.
Meanwhile, some are worried about a trade war in his presidency. Trump has talked about imposing tariffs which could lead to higher inflation. If US inflation rises the Fed might need to reconsider its monetary easing policy. The US central bank has cut rates twice in 2024 and is on track for more rate cuts in 2025.
However, any uptick in inflation would mean that the Fed would need to slow down its pace of rate cuts.
All said, despite concerns over Trump’s tariffs and the murky rate-cut outlook, bulls continue to have the upper hand. Optimism over strong economic growth has helped propel the S&P 500 higher and for now, bulls seem to ignore the somewhat bloated market valuations as well as some of the controversial policies that Trump intends to pursue.
