Strong momentum of the U.S. stock rally makes it hard to bet against this ‘freight train’

BY COMFORT OGBONNA

A relentless rally in U.S. stocks shows little sign of slowing as the year comes to an end, despite rising valuations and concerns over excessive speculation raising fears that a pullback may be overdue.

The S&P 500 closed at its 57th record high of the year on Friday, up nearly 28% in 2024. This surge has been fueled by a strong U.S. economy, expectations of lower interest rates, and optimism surrounding tax cuts and deregulation promised by President-elect Donald Trump.

Strong momentum has characterized this rally. The S&P 500 has gone more than 13 months without a 10% or greater decline from its record high—the longest streak in nearly three years. Historically, corrections of 10% or more occur about once per year on average, according to data from BofA Global Research.

“Momentum is the driving factor in the market,” said Steve Sosnick, chief strategist at Interactive Brokers. “Right now, the market is like a freight train, and no one wants to step in its way.”

Historically, betting against a market in a strong uptrend is risky. Since 1928, the S&P 500 has posted back-to-back annual gains of 20% or more five times and has been higher three months later in every instance, with an average gain of 6.3%, according to a Reuters analysis of LSEG data. Last year, the index gained 24.2%.

“Momentum feeds on itself,” said Sonu Varghese, global macro strategist at Carson Group, who maintains an overweight position in equities. “You don’t want to fight the trend.”

However, even some bullish analysts are beginning to question whether a pause might be overdue. On Friday, Bank of America’s Michael Hartnett highlighted that the S&P 500 is trading at 5.3 times its price-to-book value, surpassing its peak in March 2000. He warned of a potential “overshoot” in early 2025 and pointed to signs of froth in broader markets, such as bitcoin’s surge past $100,000 for the first time last week.

Bank of America has set a target of 6,666 for the S&P 500 in 2025, which is more than 9% above its current level. Ed Yardeni, founder of Yardeni Research, noted that several measures, including the November Consumer Confidence Index, reflect overwhelmingly bullish sentiment.

A record 56.4% of consumers now expect stocks to rise over the next 12 months, a sentiment extreme that could be a contrarian signal since it raises the bar for positive surprises.

“There are too many overly optimistic bulls for the moment,” Yardeni wrote, suggesting that a short-term pullback could provide a buying opportunity.

Lori Calvasina, head of U.S. equity research at RBC, expressed concerns in late November about crowded investor positions and high valuations. She warned these factors could leave the S&P 500 vulnerable to a 5-10% pullback. Currently, the index trades at 22.6 times forward earnings, compared to a historical average of 15.77.

For now, however, broader markets show few signs of stress. The Cboe Volatility Index (VIX), which measures investor demand for protection against market swings, fell to a nearly five-month low of 12.75 on Friday. Historically, after the VIX drops below 14, it takes an average of 136 trading sessions to climb back above 20—a level associated with moderate volatility.

Seasonal trends may also be bolstering confidence. The S&P 500 has historically posted an average gain of 1.6% in December, finishing higher 74% of the time—the strongest performance of any month, according to LPL Financial.

Of course, a market reversal is inevitable. One potential catalyst could be volatility triggered by Trump’s threat to impose steep tariffs on key trading partners, including Canada, Mexico, and China. Strategists have warned that a full-blown trade war could offset the positive effects of policies like tax cuts and deregulation.

For now, many investors remain content to stay invested. Mark Newton, head of technical strategy at Fundstrat Global Advisors, said short-term overbought conditions—indicating the market may have risen too quickly—are not enough reason to sell.

“I find it hard to justify exiting the equity market right now,” Newton said.