After breathtaking surge, US stocks’ path may rest on economic soft landing By Reuters

By Lewis Krauskopf

NEW YORK (Reuters) – Are U.S. stocks poised to continue their spectacular gains, or are there signs of a pause? That’s the question investors are asking as the end of the year approaches, as new highs loom.

Signs of slowing inflation have fueled hopes that the Federal Reserve is done raising interest rates, helping to extend a rally that has seen the S&P 500 gain more than 9% since late October. The index is now up almost 18% for the year and less than 2% from its annual high reached in July. Its closing record level, dating from January 2022, is around 6%.

The possibility of reaching these levels in the coming weeks depends in part on whether investors believe that the U.S. economy is on track for what is known as a soft landing, where the Fed will lower inflation without seriously harm growth. So far, the economy has shown resilience in the face of tightening monetary policy, although some indicators of employment and consumer demand have softened.

Rising valuations and continued high Treasury yields pose another hurdle. However, other factors, including historical seasonal trends, could favor more gains.

“We have this balance right now between a lower inflation outlook and a better interest rate trajectory… juxtaposed with a slowing economy,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. heritage.

Investor optimism about stocks has increased in recent weeks as markets rebounded from a months-long decline that stretched from August through much of October. Active investment managers’ stock exposure rose to its highest level since August, after hitting a one-year low last month, the National Association of Investment Managers’ exposure index showed. active investment.

U.S. equity funds attracted about $9.33 billion in net inflows in the week to Nov. 15, the largest weekly net purchase since Sept. 13, according to LSEG data.

Treasury yields, whose steady rise in recent months has weighed on stocks, fell quickly: the benchmark stood at 4.43% on Friday morning, compared to a 16-year high of a just over 5% last month. Yields move inversely to bond prices.

Analysts at Ned Davis Research, which recommends an overweight in stocks, said this week that investors should shift more toward stocks and out of bonds. One key factor: Weaker-than-expected consumer price data for October, released earlier this week, makes it unlikely the Fed will need to raise rates further.

“Investors are wondering whether the Fed can achieve a soft landing,” wrote Ed Clissold, chief U.S. strategist at Ned Davis Research. “The CPI report… supports the view that the tightening cycle is over and that the mantra of sustainable growth may not last as long as previously feared.”

Robert Pavlik, senior portfolio manager at Dakota Wealth, said a number of investor concerns have disappeared, including those surrounding a third-quarter earnings season that turned out better than expected.

“Retail and institutional portfolio managers are going to realize that stocks are the best place to be by the end of the year,” said Pavlik, who is “fully invested” in his stock portfolios.

Seasonality also works in stocks’ favor: November and December had the second and third highest monthly returns of the year since 1950, up 1.5% and 1.4% on average, according to the Stock Trader’s Almanac.

Stocks will face a number of tests next week. Chip heavyweight Nvidia (NASDAQ:) releases quarterly results on Tuesday, the latest report of this earnings season for the “Magnificent Seven” mega-cap companies, whose massive share price gains have sent stock indexes soaring this year .

The health of the consumer-driven economy is evident with Black Friday, the day after Thanksgiving, which marks the traditional start of Christmas shopping in the United States. Data released Wednesday showed U.S. retail sales fell for the first time in seven months in October.

A source of concern has been the further rise in stock market valuations. The S&P 500 trades at 18.7 times trailing 12-month earnings estimates, about a two-month high and well above its long-term average of 15.6, according to LSEG Datastream.

Jason Pride, head of investment strategy and research at Glenmede, said his firm was underweight equities and had larger-than-usual allocations to cash and short-term fixed income.

“Rates are still high enough, financial conditions are still tight enough that the short-term horizon … is concerning and probably does not justify the high level of valuations,” he said.

The recent rise in stocks means “the bar for positive surprises is also higher,” according to Keith Lerner, co-chief investment officer at Truist Advisory Services, who recommends increasing stock positions in a downturn.

“It would be completely normal for stocks to take a pause here,” he said.