U.S. Treasuries finally had a good week of higher prices and lower yields that reversed the sharp selloff in October and the front end of November. Prior to October, the Treasury market enjoyed five months of gains, taking the benchmark 10-year T-Note yield down to 3.60% in mid-September. The selling pressure took over amid a series of resilient economic data that sharply dialed back market expectations for more steep rate cuts from the Federal Open Market Committee (FOMC), rising odds of a second Trump presidency and a fear of inflation reignition with a widening of the deficit under a Trump administration.
During the latter part of October, expectations for another half-point cut in the fed funds rate collapsed, leaving bond traders in a lurch. While they were fairly certain of the 25-basis point cut at the Nov. 7 FOMC meeting, the notion of another quarter-point cut at the Dec. 18 FOMC meeting has become slightly better than a 50-50 proposition, with the latest CME FedWatch Tool survey now showing a 66.0% chance of a quarter-point cut to 4.25-4.50%, up from the 52.7% reading on Nov. 22.
The renewed holiday spirit to bring bond yields back down last week and finish November out on a high note was squarely tied to the latest set of inflation data coming in at forecast, Donald Trump’s choice of Scott Bessent as Treasury Secretary –considered a moderate figure who may temper some of the risks surrounding tariffs while also taking aim at the budget deficit that raised investor confidence about the economic outlook and government fiscal discipline — and the Treasury Department stating it would not increase the size of future debt sales as much as some investors had expected. The 10-year yield rallied from 4.50% on Nov. 15 to close out the month at 4.18% in strong fashion.
The rebound in the bond market has removed a major headwind for the stock market, which saw the S&P 500 trade to a new all-time high, the small-cap Russell 2000 jump 7%, some fresh buying interest in mega-cap tech that had been lagging and a source of funds due to rising concerns of tariffs and the threat of broadening FTC investigations targeting some of the Magnificent Seven companies. The sharp rally in bond prices is like a liquid hydrogen-oxygen booster for further stock market gains and sets the table for a continuation of higher highs for all the major averages.
As of Nov. 30, the gains for the year are impressive with the forward price-earnings (P/E) ratio for the S&P 500 at 22.0.
- Nasdaq Composite: +28.0%
- S&P 500: +26.5%
- S&P Midcap 400: +21.0%
- Russell 2000: +20.1%
- Dow Jones Industrial Average: +19.2%
Adding to the holiday cheer on Wall Street is a Bloomberg report that the Biden administration might temper some of its export restrictions on semiconductor and semiconductor equipment sales to China. While this might be temporary, investors are embracing any and all short-term bullish news to rationalize positive fund flows into beaten down sectors, such as chip and chip equipment stocks, for a year-end run higher. This is a developing story that will have more clarity to it this week.
Even if the bond market takes a rest and just trades sideways into year-end, the case for a further rally in equities is quickly moving to higher expected earnings growth for the S&P 500 for Q4 2024. According to FactSet, the estimated earnings growth rate for the S&P is expected to be 12.0%, doubling that of the third quarter’s 5.8% growth rate. If 12.0% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4%).
“At the sector level, eight of the 11 sectors are predicted to report year-over-year earnings growth in Q4 2024. Six of these eight sectors are expected to report double-digit earnings growth for the quarter: Financials (38.9%), Communication Services (20.7%), Information Technology (13.9%), Utilities (12.9%), Health Care (12.6%) and Consumer Discretionary (12.5%).”
“At the industry level, the five industries that are expected to be the top contributors to earnings growth for the quarter are Banks (181%), Semiconductors and Semiconductor Equipment (34%), Pharmaceuticals (64%), Interactive Media and Services (25%) and Broadline Retail (48%). Excluding these five industries, the estimated earnings growth rate for the S&P 500 for the fourth quarter would fall to 1.6% from 12.0%.”
Source: FactSet.
Few in the financial media have yet to talk up the sharply higher earnings story that is unfolding for the fourth quarter, which will be forthcoming during the January earnings reporting season. But have no doubt that when the buzz around Q4 earnings season takes hold in the coming days, it will sound like a Christmas poem.
“The investors were nestled all snug in their beds,
While visions of stock splits danced in their heads,
When out on Wall Street there rose such a clatter,
I ran to my stock screens to see what was the matter,”
That “clatter” will be the bullish preannouncement season during the next four weeks that should kick off an early Santa Claus rally that will be joyfully memorable.
