By Thomas O. Herrick
Market Strategist
November Equity Market Recap
Equities posted strong gains during the month of November. Through this writing, the S&P 500 Index has picked up almost 6% over the last thirty days. Smaller companies have performed even better, with both the Russell 2000 and S&P 600 Indexes up about 11%.1 Sentiment is bordering on bullish extremes and is a contrarian worry point. Any shift indicating rising fear, best measured by the CBOE Volatility Index (VIX) could bring about short-term market consolidation or a pullback. The VIX is inversely correlated to stock prices and is currently trading at the low end of its established range. Longer term, the continuing pivot for equities will be an additional and more dramatic rotation. The capitalization-weighted S&P 500 Index is highly concentrated and faces low odds of out-performance. For that to continue, market-heavyweight tech companies will have to exceed ever-increasing expectations. The rotation phenomenon could be in place for the next 3, 5, or 10 years. Based on our outlook, strategies that have high odds of out-performance as markets rotate: equal weight versus cap-weighted in the large-cap space, small cap versus large cap, and value versus growth.
Setting the Right Expectations
Equities rise or fall fundamentally on rising or falling earnings expectations. Valuations are a consequence of those expectations and market reactions. The good news: forward earnings expectations continue to grind higher. Forward expectations for the S&P 500 Index are close to 12% growth in Q4 2024 and close to 15% growth for the full year 2025.2 These are very solid growth numbers with no structural impediments in sight to prevent this trend from continuing.
Earnings estimates continue to grind higher.
Source: FactSet, Natixis
As seen in the chart to the right, economic growth, supported by a solid consumer and high productivity, is first and foremost in that regard. The consumer is supported by real income growth across all cohorts. Non-residential fixed investment in the form of data centers, chips factories, and infrastructure has been additive to final demand. On the monetary front, Federal Reserve policy remains restrictive and wary of sticky inflation, but it is gradually easing. That easing will support consumer spending further as consumer credit and car loans price off Fed funds rates. The drags on growth right now are residential investment and surging imports. Housing is facing an uphill battle with mortgage rates spiking. Mortgage rates key off the 10-year Treasury yield, which has spiked. Fear of widespread tariffs and potential inflationary fallout is partially at fault for sharply rising yields. Imports are surging as retailers attempt to get ahead of those same potential tariffs.
Source: Bloomberg, Natixis
1 Bloomberg
2 John Hancock
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