Market Commentary: November 2024

Written as of December 13, 2024.

Highlights this Month

• The U.S. market posted its best monthly return this year, maintaining its global dominance.
• Market momentum has made it very tough to be a bear. 
• High valuations leave little room for error.
• All eyes are on the Magnificent 7.
• Post-election markets reflect investor optimism.
• Traders hold a more balanced view of when and by how much the Fed will cut rates.
• Looking ahead to Trump’s second term, we expect his agenda to focus on two main goals.
• Signs of market excess emerge as investors chase returns.

November in Review

Canadian equities outperformed their global large-cap peers for the second consecutive month in November, as stocks continued their upward trajectory. The S&P/TSX delivered a 6.4% (total return in Canadian dollars), marginally exceeding the S&P 500's 5.9% (total return in U.S. dollars). However, when measured in U.S. dollars, Canadian equities edged up by 5.8%, marginally trailing their American counterparts. Canada's market outperformed several global benchmarks in November in local currency, though it lags slightly when returns are converted to U.S. dollars (Figure 1).

Figure 1

The U.S. market posted its best monthly return this year, maintaining its global dominance.

Like the U.S., the technology sector has been leading Canadian stocks, with financials and staples also delivering positive returns. Meanwhile, the Canadian dollar slipped by about half a cent against the U.S. dollar on December 6, with the Commodity Futures Trading Commission reporting bearish positioning by speculative currency traders.

While the S&P 500 slightly underperformed Canadian equities in November, the index achieved its best month of the year in Canadian dollars, positioning it for one of its strongest annual performances this century (Figure 2). Goldman Sachs remarked that the S&P 500’s gains in 2024 have been among the most robust since 1928.

Figure 2

Wall Street forecasters have struggled to keep up as U.S. stocks continued their upward trajectory. With the S&P 500 consistently surpassing year-end forecasts, analysts have repeatedly revised their targets upward. For 2025, Wall Street forecasts an average return of 11%, translating to a 20% gain from current levels—an optimistic outlook compared to the modest 2% growth predicted last year (Figure 3).

Figure 3

The market is feeling the holiday spirit.

Investor confidence appears strong, with Bloomberg reporting near-record long positions in S&P 500 futures among asset managers. According to the Conference Board, over half of consumers expect higher stock prices in the coming year, reflecting hopes for a soft economic landing. Retail investors are similarly optimistic (Figure 4), with many anticipating lower interest rates alongside rising markets.

Figure 4

Such market momentum has made it very tough to be a bear. 

The optimism in today’s market has made it difficult for investors who expected stocks to decline. The brief dip in early August was relatively mild – falling less than 10% before recovering. Bloomberg Intelligence reports that leveraged long ETFs - investment funds that use financial instruments to amplify gains when markets rise - now attract eleven times more capital than inverse products, which are designed to profit when markets decline (Figure 5). This record disparity illustrates the strong bullish sentiment among investors. The performance gap is particularly evident in the inverse ETF category: among 126 such funds positioned to benefit from market declines, only 14 have achieved positive returns this year, with the average fund declining 27%.

The challenging environment for defensive positions extends beyond these specialized ETF products. A Goldman Sachs index tracking heavily shorted stocks has fallen approximately 30% year-to-date. One of the few remaining ETFs structured to profit from unexpected market disruptions (known as “Black Swan” events) recently filed to liquidate after years of sustained losses. This shift in market sentiment has challenged even seasoned market commentators like David Rosenberg, who, despite maintaining caution about elevated valuations, briefly adjusted his previously bearish stance.

Figure 5

U.S. equities have dominated global markets, capturing a growing share of global capital flows.

U.S. equities have increasingly dominated global markets, now accounting for two-thirds of the world’s total stock market capitalization, up from about half a decade ago (Figure 6). This trend underscores 15 years of U.S. market leadership, with no signs of ceding ground. A rolling analysis by Datatrek highlights that while underperformance of non-U.S. equities relative to the S&P 500 has been the norm, recent performance of the MSCI All Country World Index (ex-U.S.) has trailed the S&P 500 by a statistically significant degree (Figure 7).

Figures 6, 7

This trend can be traced to fundamentals. While the S&P 500’s forward P/E multiple may appear elevated, its longer-term earnings per share (EPS) growth rate also stands out. Yardeni Research shows that forward EPS for U.S. stocks has surged to record highs, while earnings growth for the rest of the world remains relatively flat (Figure 8). Moreover, productivity growth is often considered an important factor in U.S. outperformance, with the Financial Times noting that U.S. productivity gains have consistently outpaced those of other developed economies (Figure 9).

Figures 8, 9

High valuations leave little room for error.

While the U.S. market’s performance has been noteworthy, high expectations leave little room for error. Third-quarter corporate earnings largely met forecasts, but some analysts believe this strength may have been pulled forward from the fourth quarter (Figure 10). Earnings-revision momentum has turned negative, with Bloomberg Intelligence noting that 2025 earnings per share forecasts for the S&P 500 remain largely unchanged from a year ago, despite trending lower in recent months.

Figure 10

Moderating earnings growth forecasted for the Magnificent 7 in 2025.

Following an expected combined earnings growth of 34% in 2024, Bloomberg Intelligence projects that earnings for the Magnificent 7 will moderate to an 18% growth rate in 2025. If we exclude Nvidia, the remaining six companies are forecast to deliver just 3% earnings growth. Despite this slowdown, 2025 consensus earnings forecasts for the Magnificent 7 have risen by 17% this year, compared to a 3% decline for the other 493 companies in the S&P 500 (Figure 11). Meanwhile, Strategas estimates that the group's share of total S&P 500 net income will approach 40% in 2025 (Figure 12).

Figures 11, 12 

The Magnificent 7 have delivered impressive performance, but much of this success seems to have already been reflected in the market, leaving stock valuations at historically high levels. Goldman Sachs points out that the S&P 500’s cyclically adjusted earnings yield now sits in the ninth percentile of historical valuations since 1999, versus last year’s 29th percentile. Credit spreads present an even greater concern, now in the second percentile, a significant drop from the 42nd percentile. Despite elevated Treasury yields, high-yield credit spreads are at 17-year lows, signaling stretched valuations (Figure 13).

Figures 13

These extremes make Treasury yields relatively attractive. Societe Generale highlights the rising forward price-to-earnings multiples alongside flat bond yields, as markets price in further Fed rate cuts and 15% earnings growth (Figure 14). Historically, though, U.S. rate cuts have been accompanied by slowing profit growth.

Figure 14

Post-election markets reflect investor optimism.

Since the election, the market seems to be pricing in the best-case scenario—stronger growth with lower interest rates. In general, stock prices and the U.S. dollar are up, while 10-year bond yields are down. According to the Financial Times, investors have poured $140 billion into U.S. equity funds following Trump’s victory, likely driven by the President-elect’s proposed policies of tax cuts and deregulation.

Cyclical ratios, such as copper versus gold and semiconductors versus software, are mixed, while sectors expected to benefit from deregulation, like banks versus utilities, have performed well (Figure 15).

Figure 15

A recent survey by the Association of International Certified Professional Accountants, revealed 67% of business executives are confident about next year’s economic outlook up from 26% in August. However, a survey conducted by Duke University's Fuqua School of Business highlighted that respondents were concerned about higher inflation, potentially due to tariffs and labour shortages. According to Goldman Sachs, investors view tariffs, which could fuel inflation, as the greatest policy risk in 2025.

Similarly, Bank of America’s Fund Manager Survey revealed a growing concern about the reacceleration of global inflation, identifying it as one of the biggest market risks. The post-election survey showed a significant shift in sentiment, with more investors anticipating higher Consumer Price Index (CPI) rates ahead.

Apollo, which has long maintained that the U.S. economy is stronger than many perceive, continues to question the potential for inflation. Even before the election, the firm expressed concerns about inflation, and now, with Trump back in office, they are once more raising the question of whether inflation will resurge (Figure 16).

Figure 16

Traders hold a more balanced view on Fed rate cuts.

On November 25, the futures market priced in less than a 50% chance of a rate cut in December. By December 11, however, the odds had climbed to nearly 90%, with a rate cut in January now appearing almost certain (Figure 17). Inflation, instead of continuing to decline, has remained steady, with core PCE inflation rising 0.3% for the third consecutive month in October, reaching a 3.3% year-over-year increase. The job market has shown signs of softening, with unemployment ticking up to 4.2% in November. Additionally, weaker trends in U.S. temporary payrolls and workweek have raised concerns. Despite these signals, the Fed seems more focused on slowing job growth than on rising inflation, suggesting that further rate cuts are likely.

Figure 17

Treasury markets respond to administration appointments.

As for President Trump, markets seem reassured by his nominee for Treasury Secretary, Scott Bessent. After Trump’s election victory, 10-year Treasury yields rose, but following Bessent's nomination, yields fell, signaling investor relief. Bessent, an experienced market strategist, is expected to guide Trump in a direction that benefits the economy. However, some of Trump’s other cabinet picks have raised eyebrows, even among Republican Senators.

Looking ahead to Trump’s second term, we expect his agenda to focus on two main goals.

In our opinion, Trump’s primary goal is to maximize economic growth to secure his place in history as a successful president. A strong economy, supported by Bessent’s expertise, will be key to achieving this, and a rising stock market will be an important gauge. We believe that his second focus appears to be personal profit and financial gain for his loyal circle of influencers. Cryptocurrency, a profitable sector, could play a role in this. The cryptocurrency industry contributed $131 million to pro-crypto super PACs supporting various Congressional candidates and Trump. Elon Musk, a prominent crypto advocate, reportedly donated nearly $119 million to Trump’s campaign. Additionally, in September, Trump’s family launched a cryptocurrency platform, World Liberty Financial. While the details remain unclear, this could suggest involvement in the sector, though it’s uncertain whether Trump will take a significant role.

One question is how Trump could influence the crypto industry. He has nominated Paul Atkins, a pro-crypto advocate, as SEC Chair and expressed intentions to create a U.S. government bitcoin reserve. Meanwhile, Wyoming Republican Senator Cynthia Lummis has introduced a bill that would direct the Federal Reserve to sell some of its gold reserves to purchase 1 million bitcoins. Though the scale may seem modest, this would represent a substantial move in a market with only around 20 million bitcoins in circulation, given that only 21 million will ever exist.

This raises some questions. Bitcoin, created by the anonymous figure Satoshi Nakamoto, was intended to facilitate transactions outside traditional banking systems, free from government oversight. The U.S. government’s potential involvement could be viewed as diverging from this original vision. From the perspective of maintaining the U.S. dollar’s global standing, it may not align with promoting the popularity of Bitcoin.

Bitcoin's price has followed a predictable pattern, surging more than 120% year to date through November 2024. MicroStrategy, a publicly traded company focused on Bitcoin acquisition and holding, has seen even more dramatic gains, with its stock rising over 500%. Barron's December report highlighted that investors are effectively paying $240,000 per Bitcoin based on MicroStrategy's current market capitalization and its holdings of 402,100 tokens (Figure 18).

Figure 18

Signs of market excess emerge as investors chase returns.

Wall Street is currently experiencing the largest boom in complex financial products since just before the global financial crisis (Figure 19). Adding to signs of excess, a crypto entrepreneur recently paid $6.2 million USD for artwork—a banana duct taped to a wall—and then ate it. You can’t make this stuff up. By comparison, the $28 million spent on Judy Garland’s “Wizard of Oz” ruby slippers now seems like a relative bargain. No word yet on whether the anonymous buyer plans to wear them—or if they hail from Kansas.

Figure 19 

Such stories are unsettling, reflecting a market that may have lost its bearings.

While these investments sit far outside the mainstream, investors don’t need to venture into such speculative territory. Under the Trump administration, with its focus on deregulation, a more caveat emptor ethos seems to be taking hold. However, unlike in politics, investors won’t find pardons when things go wrong. Regulation, for all its flaws, plays a critical role in safeguarding investors. Without it, they’re left to navigate the risks alone.

In more traditional markets, while valuations are higher, they are not necessarily at extremes. According to Strategas’ bull market checklist, only two out of nine indicators point to a market top, even as the S&P 500 appears poised for a second consecutive year of 20%+ gains (Figure 20). Carson Investment Management notes that after two such strong years, the S&P 500 has historically averaged over 12% gains in the following year (Figure 21). Additionally, once a bull market passes the two-year mark, it often has significant upside potential. That said, there are plenty of reasons to remain cautious.

Figure 20

Figure 21

Further productivity gains and Trump’s pro-growth agenda could help sustain general U.S. equity performance, though much of this optimism already appears priced into the market. A pullback is not only likely but could also be a healthy development. Several factors could act as potential catalysts, with higher inflation and rising interest rates ranking among our top concerns.