· Typically, after the last rate hike, S&P 500 returns go up
· Nov-Dec Period historically proves to be strong for US equities
-
Magnificent 7 balloon popping?
Learnings from the past
Periods following the end of the tightening cycle frequently, meaning over
80% of the time, result in stock returns being positive in the months post
the last Fed hike, as shown by data over the last 40 years.
Although the full effect of rate hikes takes time to feed into the real
economy and the financial markets, resulting in weaker earnings growth due
to consumers, who account for a good majority of all spending, getting
squeezed. Equity valuations usually get a boost from the Fed’s dovish or
less restrictive stance, as market participants start pricing in the
effects of rate cuts on equities with more confidence.
Source: J.P. Morgan Asset Management
Bulls look to be gearing up for a huge end-of-year rally.
The last two months of the year frequently turn out to be great for
equities.
Despite October’s negative return, which marked the 3rd consecutive month
of declines for the S&P 500, for the first time since the COVID-19
pandemic, an event with a relatively rare occurrence in the market.
This negative streak is on track to be broken in November-December, the
strongest two-month return period on average.
The festive spirit and many discount campaigns, including Black Friday,
allure consumers to spend more, lifting the economy and revenues for many
public companies.
Further, on average, the last month of the year has the highest chance of
positive monthly returns for the S&P 500 at 74%, according to
historical data by LPL Research.
Source: LPL Research
Potentially, lower long-term rates and a stable growth environment will
serve as a tailwind of equities/
If we look at SPX average returns by months and extrapolate that for 2023
YTD, it’s clear that it has much room for growth, potentially finishing
near its all-time high of 4800-ish, helped by what could turn out to be
another major Christmas rally.
Source:GS GIR and GS Asset Management
The S&P 500 has been rallying lately due to better-than-expected macro
data, including SLOOS numbers revealing that lending standards tightened at
a slower rate than last quarter and softer CPI print that bolstered bets
that the Fed had ended its hiking campaign.
Magnificent 7 balloon
However, one big caveat here is that most, if not all, of the gains in the
S&P 500 come from AI-related stocks.
The market, especially its engine, the magnificent 7, appears to be quite
expensive on a given where ten-year Treasuries yield is, despite its drop
from 5% to 4.5% in the last few weeks.
The “big 7” trades at a jaw-dropping of close to 30x forward earnings,
while the rest of the market is at 17x. In a historical context, given
where rates are, the S&P 500 is slightly overvalued at 19x earnings vs
its long-run average of 15x.
What is more, the concentration in the S&P 500 is tighter than ever.
The “Big 7” adds up to nearly 29% of the S&P 500’s weight, while its
top 2 contributors, Apple and Microsoft, account for over an eye-popping
15% of the whole index.
All in all, if the AI mania goes down, the S&P 500 will likely follow
suit.
Investors can long the S&P 500 using our
3x US 500
,
5x US 500
Alternatively, they can short or hedge their long positions on the S&P
500 using our
-3x US 500
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