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U.S. Stock Market Gains Momentum Towards Year-End, Balanced by High Expectations for December and 2024

The U.S. stock market is expected to end November on a high note, with predictions of sustained momentum through the end of the year.

The U.S. stock market is expected to end November on a high note, with predictions of sustained momentum through the end of the year. Michael Arone, Chief Investment Strategist at State Street, suggests that a strong finish for 2023 is likely, supported by factors such as economic expansion, resilient consumer behavior, improving earnings, moderating inflation, and the anticipation that the Federal Reserve will halt interest rate increases.

Despite the S&P 500 being technically overbought, which could lead to some short-term consolidation, the outlook remains positive. Historical trends support this optimism; the S&P 500 has risen in December 76.7% of the time following at least a 15% gain through November.

However, the 2023 rally has been marked by narrow leadership, mainly driven by a handful of large tech stocks, leaving the broader market somewhat behind. This has led to the lowest market breadth in a gainful year and an unprecedented dominance of U.S. stocks in global indexes.

Yet, there are signs of a broader recovery. Both the iShares MSCI EAFE ETF and the iShares MSCI Emerging Market ETF have posted gains, with small-caps also showing a resurgence in November, indicating a potential shift towards more opportunistic investment strategies.

The stock market closed with gains in a holiday-shortened session, approaching the year’s highest close. Yields on Treasury notes have declined, and investors are now pricing in potential rate cuts starting next spring, which has helped push stocks higher.

Still, the journey ahead could be challenging. The effects of the Fed’s previous rate hikes may not have been fully realized, and fiscal stimulus is expected to decrease. Furthermore, the market’s reaction to third-quarter earnings suggests that investors have higher expectations, rewarding overachievers less and penalizing underperformers more harshly than usual.

Looking ahead, investors may be setting a high bar for 2024, with anticipated earnings growth for the S&P 500, thereby potentially creating a tough environment for satisfying market expectations.

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