Is the Stock Market Extravaganza Still Going Strong?

As we approach the end of another remarkable year for the American stock market, investors are eager to see how the final month of 2024 unfolds. The markets have reached a stage where they are hovering near historical highs, setting a promising backdrop for the coming weeks.

In the shortened trading sessions following last week's holiday, the Dow Jones Industrial Average surged by over 2%. At the same time, both the Nasdaq Composite Index and the S&P 500 also experienced gains exceeding 1%. Notably, the S&P 500 and Dow Jones recorded their all-time highs in November, adding to the optimism surrounding market performance.

The upcoming week brings a slew of crucial labor market data for investors to digest. The U.S. Bureau of Labor Statistics is set to release its employment report for November on Friday, which is anticipated to be the week's most critical data point. Additional reports highlighting job vacancies and private sector wage growth, alongside figures for services and manufacturing activities, will also come into play this week.

Investors will undoubtedly be focused on this data, as it may offer insights into the Federal Reserve's anticipated actions regarding interest rates, with an announcement expected on December 18. Current market sentiments suggest a keen interest in how the labor market figures may influence future monetary policy.

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Turning our attention to corporate news, earnings reports from Salesforce (CRM), Okta (OKTA), and Lululemon (LULU) are poised to take center stage in the forthcoming reporting week. These financial disclosures could provide vital indicators as to how well these companies are navigating the economic landscape.

When looking at employment data, it's clear that the market's expectations regarding anticipated interest rate cuts by the Federal Reserve have evolved significantly in recent months. According to the CME FedWatch Tool, as of last week, market participants assign a 66% probability to a rate cut during the Fed's last monetary policy meeting of the year on December 18. Furthermore, there's a widespread anticipation that additional cuts may follow in the upcoming year as concerns about inflation and economic growth remain at the forefront of discussions.

Despite a gradual cooling in the labor market, the slowdown is not severe enough to assuage the Fed’s inflation vigilance; therefore, hopes for aggressive rate cuts in 2025 are becoming less convincing. This week's November employment report is set to offer an update on these expectations. Economists are forecasting a stark improvement from October's dismal reports, which many attribute to disruptions caused by hurricanes and labor strikes.

Predictions for the November report suggest that the U.S. labor market added around 200,000 jobs during the month, a significant uptick from a mere 12,000 in October. Additionally, the unemployment rate is projected to see a slight rise from 4.1% to 4.2%, a fluctuation that may be interpreted as a sign of ongoing softness in job conditions.

The economic team at Wells Fargo, led by Jay Bryson, shared insights with their clients, indicating that while the labor market remains solid in an absolute sense, the softening trend in job conditions is still apparent. They expect this information to be reflected more clearly in the unemployment rate, projecting it to rise to 4.2%.

On another note, analysts' predictions for the profitability of the so-called "Seven Giants" in tech remain robust. As Wall Street strategists present their projections for 2025, they generally maintain an optimistic stance, foreseeing the S&P 500's year-end target to fall between 6,400 and 7,000. In these forecasts, a common theme emerges highlighting the potential for market rallies that might extend beyond the typically dominant tech giants—Apple, Google, Microsoft, Amazon, Meta, Tesla, and Nvidia—to include the broader spectrum of the remaining 493 stocks within the index.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, articulates that while they believe market rallies may continue to broaden or pivot towards value stocks, opportunities in this realm will be challenging to navigate. She notes that strong economic growth could bolster the performance of the broader S&P 493 index.

However, not all financial experts share this optimistic sentiment. Venu Krishna, Barclays' head of U.S. equity strategy, emphasizes that the substantial tech firms continue to outperform earnings expectations quarter after quarter. As long as this trend persists, Krishna posits that these tech giants will likely continue to be pivotal in driving the S&P 500 index's earnings growth.

Krishna suggests that despite the anticipated market expansion next year, many leading tech firms have seen more positive earnings revisions compared to their counterparts in the S&P 500 index. DataTrek's co-founder, Jessica Rabe, highlights that in the past 30 days, six major tech companies revised their earnings forecasts for the current quarter either upward or maintained them, contrasting with the S&P 500's average expected decline of 1.2%.

Meanwhile, the 10 largest non-tech companies within the S&P 500 have seen their earnings forecasts trimmed by an average of 2.7%. Rabe underscores the robust momentum behind America's large tech firms, noting that they greatly outpace the overall S&P index and its top non-tech firms. With large-cap tech constituting about one-third of the index, their foundational performance wields considerable influence over the broader market.