The stock market rally in November has been nothing short of impressive. In fact, based on recent performance, we are now confident that the S&P 500 index has the potential to reach a record high by the end of the year.
During the past week, the S&P 500 witnessed a significant gain of 2.2%. The Dow Jones Industrial Average also experienced a notable increase of 1.9%, while the Nasdaq Composite rose by 2.4%. Tuesday played a crucial role in this rally, as October’s consumer price index turned out to be lower than expected. This development solidified the belief that the Federal Reserve will halt its interest rate hikes.
The consumer price index reading was indeed promising. The headline number remained relatively unchanged compared to the previous month, while the core CPI (which excludes volatile food and energy prices) rose by 0.2%, slightly below the projected 0.3%. This data provided further evidence that the Fed is effectively addressing the issue of inflation. As a result, the probability of an interest rate hike in December has fallen to a mere 0.2%, according to the CME FedWatch Tool. Moreover, the tool also indicates a 28% chance of a rate cut in March. Notably, the S&P 500 has soared by 10% over the past three weeks – marking its most significant three-week gain since 2020.
This rally is one that should not be ignored. The S&P 500 currently stands at an impressive 4514, surpassing key levels and demonstrating remarkable strength. It has successfully broken through every important level since its recent low, with just one obstacle remaining: 4520. This level has posed resistance in the past, and breaking through it now proves to be challenging. Nonetheless, the fact that the market has not retracted suggests that investors remain optimistic and continue to invest in stocks.
The Potential for S&P 500 to Reach New Heights
If the S&P 500 manages to break through the 4520 level, it could set off a flurry of bullish activity. Its strong momentum may carry the index back to its intraday high for the year at 4607, which is only a 2.1% increase from the current level. Furthermore, there is a possibility that it could surpass its all-time intraday high of 4818, achieved in January 2022. Additionally, the upcoming December seasonality should provide an extra boost, as historical data reveals an average gain of 1.5% for stocks during this time period since 1950.
According to Jay Woods, chief global strategist at Freedom Capital Markets, all the necessary conditions are in place for the S&P 500 to make a run at reaching new peaks. Woods believes that there is an overwhelming amount of momentum and a significant fear of missing out among investors driving this potential surge.
However, there are a few obstacles that could impede this upward trajectory, and they go beyond technical factors. It is noteworthy that both the S&P 500 and the iShares 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) have experienced recent gains. This implies that bond yields will need to remain at their current levels or move even lower for the S&P 500 to continue rising. Dennis DeBusschere, founder of 22V Research, argues that economic data has been slowing down enough to keep yields stable, stating that “10-year yields should remain around current levels as long as estimated GDP growth is around current levels.”
A growing economy often translates to increased corporate sales. Analysts predict that revenue at S&P 500 companies will grow at an annual rate of 5.1% over the next couple of years, according to FactSet. Additionally, with the cost of materials and salaries expected to rise at a slower pace, companies can enhance their profit margins and have more cash available for share buybacks. It is projected that earnings per share will grow at a rate of 12% over the next two years. While this may appear overly optimistic, it is a concern for the future, and for now, investors can relish in the current upside potential.