An old Wall Street saying, “don’t fight the tape,” warns not to trade against prevailing market trends. With the S&P 500 Index up about 28% year-to-date, investors seem to be taking that advice enthusiastically.
Lower inflation, Federal Reserve interest rate cuts and optimism about the incoming Republican administration have all driven market gains. Now, the bullish narrative in markets has shifted to the power of the “technicals”—market trends like momentum, asset flows, liquidity, seasonality and investor sentiment—to drive equity indices to new heights.
Technical Trends May Boost Stocks
Indeed, these technical factors have been noteworthy.
- The market’s upward momentum has been extraordinary and its “breadth” solid, with market leadership rotating to include cyclicals and small-cap stocks, easing some of the concentration risk surrounding the biggest tech companies.
- Money flowing into passive U.S. equity index-tracking funds hit an all-time high of $144 billion in November.
- Market “liquidity” (or the ease with which an asset can be quickly bought or sold) is outstanding amid easy financial conditions and U.S. government monetary support.
- Seasonality is favorable, with December historically ranking among the best months for major U.S. stock indices.
Morgan Stanley’s Global Investment Committee acknowledges these positive trends and believes they may well power the S&P 500 another 5%-10% higher over the next 12 months.
Investors Growing Complacent?
However, we also see reason to question whether investors’ recent trend following has dangerously morphed into complacency. Consider:
- Asset managers are holding their highest net “long” exposure to the S&P 500 in more than 20 years, signaling an unusually high degree of optimism that the index will keep rising.
- Fewer investors are buying equity “put” options (which allow them to sell a stock at a specific price, often to hedge against big price drops) relative to those buying bullish “call” options (allowing them to buy at a specific price, in anticipation of the stock going up). The ratio of put to call options is below average, signaling that investors are more likely to expect stocks to go up.
- The CBOE Volatility Index (VIX), known as the stock market’s “fear gauge,” is a very benign 12.8, versus a long-run average around 20.
- Enthusiasm among retail investors for stock-market gains in the year ahead has never been higher in the 37 years that the Conference Board has been surveying market expectations.
- Finally, we have only seen this kind of outperformance of the momentum factor twice in the last 70 years: during the Tech Wreck of 1999 and the meme-stock crash in 2021.
Lackluster ‘Fundamentals’ Signal Caution
Perhaps more importantly, despite a resilient U.S. economy, corporate profitability has been lackluster over the past year, with S&P 500 earnings growing an annualized nearly 8% in the third quarter. When you exclude the “Magnificent 7” mega-cap technology stocks, earnings growth is roughly half of that number.
Surprisingly, already-rich equity valuations have continued to expand, even as recent Fed policy rate cuts have not translated to lower market rates or borrowing costs that might typically support these higher multiples.
Heading into 2025, we caution that once the post-election market enthusiasm ends, investors will need to see stronger corporate fundamentals sustain the narrative of accelerating earnings growth and margin expansion.
Portfolio Moves to Consider
Experience and prudent risk-management practices teach us that technicals are nothing more than trend-following—which works, until it doesn’t. At inflection points, fundamentals and valuations matter.
Given these dynamics, investors should consider eliminating large concentrations in the Magnificent 7 and other recent “Trump trade” outperformers. Policy dynamism and discordance are likely to produce new market leadership, and stock picking will be critical.
The Global Investment Committee favors financials, energy, residential real estate and domestically focused manufacturers of industrials and branded consumer goods.
Long-term investors should focus on portfolio rebalancing and maximizing their diversification among stocks, bonds, real assets, hedge funds and private investments.
Información extraída de: https://www.morganstanley.com/ideas/stock-market-rise-2025-trends
