The market is entering the final two trading days of 2024, and stocks are set to post another strong year of gains.
The Nasdaq Composite (^IXIC) once again led the charge in 2024, rising more than 30% thus far while the S&P 500 (^GSPC) has risen over 25%. The Dow Jones Industrial Average (^DJI) is up a more modest 14%.
A holiday-shortened trading week with limited news on the docket is expected to greet investors in the final trading week of the year. Markets will be closed for New Year’s Day on Wednesday, and no major companies are slated to report quarterly results.
In economic data, updates on housing prices and sales, as well as a a look at activity in the manufacturing sector, are expected to highlight a subdued week of releases.
But stocks have not been in the holiday spirit. All three major averages sold off Friday, with the Nasdaq falling nearly 1.5%.
Since 1950, the S&P 500 has risen 1.3% during the seven trading days beginning Dec. 24, well above the typical seven-day average of 0.3%, according to LPL Financial chief technical strategist Adam Turnquist. History has shown that if Santa does come and the S&P 500 posts a positive return during the time period, then January is typically a positive month for the benchmark index and the rest of the year averages a 10.4% return.
When the S&P 500 is negative during that time frame, January usually doesn’t end in the green, and the return for the upcoming full year averages just 5%, per Turnquist. Three days into this year’s Santa Claus period, which will close on Friday, Jan. 3, the S&P 500 is down less than 0.1%
While history may be flashing a warning sign, it’s notable that last year the Santa Claus rally didn’t materialize. January started poorly too. Still, the S&P 500 is still set to end the year up more than 20%.
As markets have digested the Federal Reserve’s recent message that interest rates may remain higher for longer than investors had hoped, bond yields have been soaring. The 10-year Treasury yield (^TNX) is up more than 40 basis points in December alone.
Hovering right above 4.6%, the 10-year is at its highest level in about seven months and in the territory where equity strategists believe higher rates could begin to weigh on stock performance.
“I think 4.5% or higher on the 10-year gets problematic for the markets more broadly,” Piper Sandler chief investment strategist Michael Kantrowitz said in a recent video sent to clients.
“In the last couple of years, really markets have only gone down because of rising interest rate or inflation fears,” Kantrowitz said on Dec. 18. “And I think that’s the new normal that going forward. Market corrections are going to come from higher rates, not slower growth or higher unemployment.”
Despite the recent drawdown in markets since the Fed meeting on Dec. 18, the setup heading into 2025 “has really not changed,” Citi US equity strategist Scott Chronert wrote in a note to clients on Friday.
Stock valuations remain high. Earnings are expected to grow about 15% year over year for the S&P 500, per FactSet data, creating a “high bar” to impress investors. US economic growth is largely expected to remain resilient.
“In aggregate, investors appear bulled up on US equities,” Chronert wrote.
This has pushed market sentiment, as measured by Citi’s Levkovich Index, increasingly higher. The Levkovich Index, which takes into account investors’ short positions and leverage, among other factors, to determine market sentiment, currently sits at a reading of 0.62, above the euphoria line of 0.38, where the likelihood of positive forward returns is typically lower as the market appears stretched.
For now, this isn’t shaking Chronert’s overall confidence in the US equity market. He noted that the “fundamentals” that have driven the market rally remain intact.
But strategists argue that stretched sentiment and valuations do put the market rally on thinner ice should a catalyst that challenges the bull thesis for 2025 emerge.
“Overall, this setup, plus the lack of real correction in some time, does leave the market more susceptible to increasing bouts of volatility,” Chronert wrote. “If the fundamental story holds, we would be buyers of first half pullbacks in the S&P 500.”
People photograph the New York Stock Exchange in New York’s Financial District on Dec. 23, 2024. (AP Photo/Peter Morgan, File) ·ASSOCIATED PRESS
Weekly Calendar
Monday
Economic data: MNI Chicago PMI, December (42.8 expected, 40.2 prior); Pending home sales month-over-month, November (0.9% expected, 2% prior); Dallas Fed manufacturing activity, December (-1.5 prior, -2.7 prior)
Earnings: No notable earnings.
Tuesday
Economic data: S&P CoreLogic 20-City year-over-year, October (+4.11% expected, +4.57% prior); Dallas Fed Services Activity, December (9.8 prior)
Earnings: No notable earnings.
Wednesday
Markets are closed for New Year’s Day.
Thursday
Economic data: MBA mortgage applications, week ending Dec. 20 & week ending Dec. 27, Initial jobless claims, week ending Dec. 28 (219,000 expected); S&P Global US manufacturing PMI, December final (48.3 expected, 48.3 prior); Construction spending month-over-month, November (+0.3% expected, +0.4% prior)
Earnings: No notable earnings.
Friday
Economic calendar: ISM manufacturing, December (48.3 prior, 48.4 prior); ISM prices paid, December (50.3 prior)
Earnings: No notable earnings.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
