Will we get a Santa rally in 2024?

The US sharemarket has pushed higher since the election, building on the strong gains we saw leading up to it.

The S&P 500 index is up 27 per cent (including dividends) so far in 2024, on the back of a similar rise last year.

Despite the 60 per cent return since the end of 2022, investors are upbeat and a traditional “Santa rally” is on the cards.

Under the incoming administration markets expect deregulation, a resurgence in mergers and acquisition activity, and a reopening of the IPO market.

Policy changes aren’t the only reason for optimism, with another impressive earnings season having just wrapped up.

That was the fifth consecutive quarterly increase and analysts see more gains ahead.

For the 2025 calendar year, earnings are expected to grow a healthy 15 per cent, led by the technology, healthcare and industrials sectors.

Corporate buybacks are happening in earnest, and this year could be one of the highest on record for share repurchases.

As impressive as all that sounds, there are a couple of caveats.

One is valuations, which are high.

The S&P 500 is trading on a price/earnings (PE) ratio of 22.1, which is well above the 25-year average of 16.6.

Then again, the likes of NVIDIA and other high-growth tech companies have dragged that up in recent years, and the median stock has a more reasonable PE of 18.3.

The US sharemarket has changed a lot in recent years, and historic valuations might not be the useful yardstick they once were.

Gross margins for the likes of Microsoft, Apple and Amazon are much higher than the heavyweights of old, which is a key reason companies are priced more highly these days.

High margins have traditionally been a sign companies were overearning.

This would’ve typically attracted competitors to the industry, weakening the position of the incumbents and forcing those margins lower.

Things might be a little different now, and we could be comparing apples and oranges.

While I’d be reluctant to bet against the best businesses in the world, those concerned about elevated prices have plenty of opportunities elsewhere.

I don’t think high valuations will hold the market back, as long as the US economy keeps performing well and earnings continue to grow.

That’s never a given, but right now activity is healthy, the labour market is solid and the Federal Reserve will keep easing monetary policy (even if goes a little slower).

That’s a positive backdrop for shares.

We need to keep an eye on longer-term interest rates and make sure they don’t rise too far too fast.

Sometimes it’s the speed of an increase that causes volatility, more so than the rise itself.

The jobs report next Friday is a key data point to watch.

Last month’s figures were very weak, but these were impacted by strikes and weather so it’s hard to get a handle on exactly what we’ll see this time around.

This will be the last major release ahead of the December Fed meeting, which looks like a coin flip between a pause or another cut.

Investors would prefer the latter, but pausing because the economy is robust doesn’t make for a terrible narrative either.

December is typically a very good month for US shares, and one of the strongest of the year.

Since 1950, the S&P 500 has returned an average of 1.5 per cent in December, finishing higher 74 per cent of the time.

That’s well above the average monthly return of 0.7 per cent, and the hit rate for all months of 61 per cent.

There’ll be a lot to consider in 2025, with tariffs, inflation and the US deficit in focus for investors.

For now, the stars appear to be aligned for a good finish to the year.

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