Even after the strongest rally since the early days of the dot-com boom, the S&P 500 index still has room to push higher through the end of the year, according to JPMorgan Chase & Co.’s trading desk.
Derivatives analysts at the bank say the most popular options traders are betting the U.S. stock benchmark will hit 6,200 to 6,300 this month, implying a further advance of about 3% to 4% before the year is out, based on Friday’s close around 6,032.
“We remain tactically bullish heading into year-end given the positive macro environment, earnings growth and a Federal Reserve that continues to support markets,” head of Global Market Intelligence Andrew Tyler wrote in a note to clients on Monday. “We think it makes sense to play the market’s momentum and see a low pullback potential until mid-January.”
Tyler’s team recommends a heavier tilt toward value and cyclical companies such as banks, automakers, transportation companies — except airlines — and the small-cap Russell 2000 index. On the tech and telecom side, they say, stay invested in the so-called Magnificent Seven tech stocks, data centers and semiconductors.
Wall Street strategists are generally optimistic about the outlook through the rest of the year — a time that tends to be strong for stocks in general.
The trading desk at Goldman Sachs Group Inc. has estimated that the S&P 500 will approach 6,300 by the start of 2025, in line with the level marked by JPMorgan’s trading desk. The last two weeks of December and the first two weeks of January are by far the best four-week stretch of the year, averaging a 2.6% return since 1928, according to Scott Rubner, Goldman Sachs’ managing director of global markets and tactical specialist.
But this time is hardly conventional, with the S&P 500 already staging its best first 11 months to a year since 1997. That has left it on track to post back-to-back annual gains of more than 20% for just the fourth time in last century, according to an analysis by Deutsche Bank AG. The big advance has taken the index to high valuations at more than 22 times expected 12-month earnings, compared with an average reading of 18 over the past decade.
However, the rally is likely to face some pressure in the middle of next month, before fourth-quarter earnings get underway and President-elect Donald Trump is inaugurated, which will shift focus toward policies — like rate hikes — that create uncertainty about economic prospects. It has already pushed up bond yields on expectations that his policies, including a push to deport workers in the US illegally, will stimulate inflationary pressures.
But that hasn’t dampened the bullish mood on Wall Street. Forecasts from major banks for 2025 show broad expectations that the stock market will extend the rise: Predictions from Goldman Sachs, Morgan Stanley and Bank of America Corp. falling around the 6,600 line, with estimates going as high as 7,000 from Deutsche Bank and Yardeni Forskning.
Those reaching for a historical analogy to the current zeitgeist should look to the mid-1990s, according to JPMorgan’s Tyler. It was once again that the Fed made a so-called soft landing by tightening monetary policy without tipping the US into recession. It was also marked by elevated interest rates and excitement over technological breakthroughs.
–With assistance from Natalia Kniazhevich, Jan-Patrick Barnert and Jessica Menton.