S&P 500’s $11 Trillion Run Shows Signs of Fatigue: Markets Wrap

(Bloomberg) — A rally that drove stocks to a series of all-time highs showed signs of exhaustion, with investors awaiting this week’s key jobs data and Jerome Powell’s remarks for clues on whether the Federal Reserve will cut rates in December. Bonds and the dollar barely budged.

Wall Street also refrained from making riskier bets amid intense volatility in South Korean assets as President Yoon Suk Yeol said he will lift a martial law decree, just hours after his dramatic move imposing it. US equities struggled to make headway, following an $11 trillion surge that sent S&P 500 to its 54th record this year. Some traders noted that the relentless advance drove sentiment gauges toward extremes, with the benchmark hovering near overbought levels.

Positioning in S&P 500 futures is “completely one-sided,” according to Citigroup Inc.’s Chris Montagu.

“Things are getting extremely crowded on one side of the boat — the bullish side,” said Matt Maley at Miller Tabak + Co. “Valuation levels are a lousy timing tool. However, sentiment and positioning are better tools. So it’s not out of the question that today’s extreme readings on these issues could create a surprising pick up in volatility before year-end.”

Just a few days ahead of the US payrolls report, data showed job openings picked up while layoffs eased, suggesting demand for workers is stabilizing. Fed Bank of San Francisco President Mary Daly said a rate cut this month isn’t certain, but remains on the table.

“The question for investors isn’t ‘will the Fed cut again.’ but rather ‘will the next cut be in December or January’,” said Lauren Goodwin at New York Life Investments. “Our base case is that the Fed cuts 25 basis points in December, but we have much higher confidence that another cut is coming in December or January as the data evolves.”

The S&P 500 was little changed. The Nasdaq 100 added 0.1%. The Dow Jones Industrial Average slid 0.1%. Salesforce Inc. is due to report results after the close. Germany’s DAX topped 20,000.

Treasury 10-year yields advanced two basis points to 4.21%. Oil rose as the US imposed more sanctions targeting Iranian crude and OPEC+ made progress on a deal to keep output off the market.

Bank of America Corp. clients continued to pile into US equities last week as post-election enthusiasm persisted, with purchases made by hedge funds and retail investors.

Net inflows by the bank’s clients totaled $800 million in a holiday-shortened week ended Nov. 29, quantitative strategists led by Jill Carey Hall said Tuesday.

The foundation for US stocks is still firm, but it’s starting to show minor signs of cracking as 2025 approaches, according to Gina Martin Adams and Michael Casper at Bloomberg Intelligence.

Their latest market-health checklist summarizes the state of 17 timely indicators in three categories — technicals, earnings trends and bonds/macroeconomic signals — and shows two red flags at this time — in revision momentum and economic regime. There are eight mixed (yellow) signals and seven all-clear (green) ones.

“Technical cues are less than perfect given shifting leadership to smaller-cap stocks, but the price trend is still very strong,” they said. “Earnings cues have weakened a touch as comparisons get more challenging and margin forecasts wobble. Macroeconomic indicators remain decidedly muddled, as all cues in our economic regime model show sputtering momentum.”

History suggests a Fed easing cycle could offer resolute support for stocks, and clearly more if it’s accompanied by steady economic conditions, according to Nathaniel T. Welnhofer at BI.

Since 1971, the S&P 500 posted an annualized return of 14.9%, and since the late 1970s, the Russell 2000 gained 17.2% in periods when the central bank cut rates, he said. 

The results were much stronger during rate-cutting cycles in non-recessionary periods: Large caps averaged a 25.2% annualized return vs. 11% in recessionary periods, while small caps averaged 19.6% and 16.5%, respectively.

“If the Fed stops easing early, the pace of gains for stocks will likely depend more on the state of the economy,” Welnhofer added. The S&P 500 has posted a 0% return on average in the three months just after the end of easing cycles, but is down 9.9% when the economy was in recession, compared with 3.3% when it wasn’t.

“The US economy continues to hum along, the Fed is on its path to lower interest rates, and earnings growth remains strong,” said Bret Kenwell at eToro.

Kenwell notes that’s a scenario that could continue favoring the small-cap space — with the Russell 2000 being the top-performing major index since the US presidential election. 

The gauge gained more than 10% in November alone — the second time it has done so this year after accomplishing the feat in July. Going back to 1979, when the Russell 2000 posted a monthly gain of that magnitude, it was higher 90% of the time six months later with an average gain of 11.4%.

“While the statistics are favorable for small caps moving forward, so are the fundamentals,” he said. “Even the recent spike in 10-year Treasury yields has done little to deter small-cap investors.”

“US stocks are likely to continue grinding higher into next year. In our view, the exuberance synonymous with frothy financial markets is far from widespread,” said Solita Marcelli at UBS Global Wealth Management. “While we expect bouts of volatility and corrections in the year ahead, we continue to believe that the S&P 500’s next leg up to our December 2025 target of 6,600 will be fueled by solid economic growth, the Fed’s easing, and AI advancement.”

Within the US equity market, she favors technology, utilities and financials.

A New York University professor known for his expertise on valuations says the “Magnificent Seven” megacaps are a buy during corrections as most of them will keep generating money.

“As a value investor, I have never seen cash machines as lucrative as these companies are,” Aswath Damodaran, a finance professor at NYU’s Stern School of Business, said in a Bloomberg Television interview. “And I don’t see the cash machine slowing down.”

There will be corrections and “I’d suggest that when that happens you find a way to add at least one, maybe two or three of these companies, because these are so much part of what drives the economy and the market,” he added.

Corporate Highlights:

• Intel Corp.’s search for a new chief executive officer will focus heavily on outsiders, with the chipmaker considering candidates such as Marvell Technology Inc. head Matt Murphy and former Cadence Design Systems Inc. CEO Lip-Bu Tan, according to people familar with the situation.
• AT&T Inc. predicted sustained profit growth over the next three years, including double-digit gains in 2027, a payoff from its investments in mobile-phone and fiber-optic networks.
• BlackRock Inc. agreed to buy HPS Investment Partners in an all-stock deal valued at roughly $12 billion, a purchase that will propel the world’s largest asset manager into the highest ranks of private credit.
• SpaceX is in talks to sell insider shares in a transaction valuing the rocket and satellite maker at about $350 billion, according to people familiar with the matter.
• Bank of Nova Scotia missed earnings estimates on higher-than-expected expenses and taxes.
• Honeywell International Inc. and Bombardier Inc. reached a deal on the development of aviation technology and settled a long-running legal dispute.
• MARA Holdings Inc. bought the North Texas wind farm in Hansford County from a joint venture between National Grid Plc and the Washington State Investment Board,
• Zscaler Inc., a security software company, gave a forecast for adjusted second-quarter earnings that missed expectations.
• Children’s Place Inc. posted profit that missed the average analyst estimate.

Key events this week:

• S&P Global Eurozone Services PMI, PPI, Wednesday
• US factory orders, US durable goods, Wednesday
• Fed’s Jerome Powell and Alberto Musalem speak, Wednesday
• Fed’s Beige Book, Wednesday
• Eurozone retail sales, Thursday
• US initial jobless claims, Thursday
• Eurozone GDP, Friday
• US jobs report, consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 2:42 p.m. New York time
• The Nasdaq 100 rose 0.1%
• The Dow Jones Industrial Average fell 0.1%
• The MSCI World Index rose 0.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.1% to $1.0513
• The British pound rose 0.2% to $1.2677
• The Japanese yen rose 0.1% to 149.39 per dollar

Cryptocurrencies

• Bitcoin was little changed at $95,491.79
• Ether fell 1.1% to $3,578.01

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.21%
• Germany’s 10-year yield advanced two basis points to 2.05%
• Britain’s 10-year yield advanced three basis points to 4.24%

Commodities

• West Texas Intermediate crude rose 2.8% to $70.04 a barrel
• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.

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