Market Exuberance Ahead: Stocks Poised for Strong Gains
The recent stock market rally following the presidential election victory may be just the beginning of a remarkable few months of growth. According to Julian Emanuel, a leading strategist at Evercore ISI, “exuberance lies ahead” as President-Elect Trump moves swiftly on policy initiatives, driving stocks higher in response.
A Perfect Storm of Speculation and Policy
Emanuel predicts the S&P 500 will reach 6,600 by the end of June 2025, an 11% increase from its current level. This optimism is fueled by a resurgence in speculation, as evident in Wednesday’s market action, where bitcoin hit 76,000 for the first time and Tesla stock soared 14%. Emanuel notes that market tops are often marked by exuberance, but key signs of an overstretched market rally are absent, including subdued IPO activity and a lack of meme-like stock surges.
Valuations: A Historical Perspective
While the S&P 500’s current valuation of over 24 times past 12 months’ earnings may seem expensive, Emanuel reminds us that high valuations aren’t typically a reliable market-timing tool. In fact, “expensive has a history of getting more expensive and lasting longer with greater gains.” The strategist cites the history of bull markets, noting that the current 25-month-old bull market has returned 65%, well short of the average 50-month-long bull market that returns 152%.
Fed’s Cutting Cycle Supports Stocks
Emanuel argues that the Fed’s cutting cycle also supports the case for stocks to run higher. Despite the 10-year Treasury yield soaring 80 basis points to 4.42% since the Fed’s rate cut on September 18, the S&P 500 has risen over 5%. This unusual phenomenon has only occurred once before, during the 1995 “soft landing,” which marked the start of a remarkable stock market era.
A Mania in the Making?
Stifel chief equity strategist Barry Bannister shares Emanuel’s optimism, suggesting that the S&P 500 has entered a mania. While Bannister acknowledges the index could reach the low 6,000s in the coming months, he also warns of a downside scenario where the index falls to 5,250 a year later, driven by a resurgence in inflation and higher interest rates.
Risks Ahead: Inflation and Interest Rates
The key risk to this optimistic outlook is a resurgence in inflation, which could prompt the Fed to keep interest rates higher for longer than markets expect. As Bannister notes, “if inflation proves resurgent… we suspect Chairman Powell’s last 12 months in office (May 2025 to May 2026) are a significant investor risk.”
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