December will begin with investors owning little stock. Is a year-end rally at play?
Wall Street thinks you don’t own enough stock. Not “you,” specifically, but investors as a collective are viewed as too lightly exposed to equities given the S & P 500 is three years into a bull market and is back to within 1% of its all-time peak from a month ago. Deutsche Bank’s comprehensive investor positioning gauge is hovering around neutral. John Flood, head of Americas equities sales trading at Goldman Sachs, says: “Our sentiment indicator has spent most of the year in negative territory reflecting relatively conservative institutional investor positioning. The wall of worry has been extremely high this year and remains omnipresent (this is a bullish signal).” The reason to note such assessments is that we’ve entered the season when “flow-of-funds” trends and the mechanical maneuvering of investors toward a final scorecard for the year tend to form the core of the bulls’ argument. Essentially all earnings for 2025 are in the books. Recent Federal Reserve messaging has restored expectations of a rate cut on Dec. 10. Business-news flow is set to slow down as holidays encroach. Which leaves market handicappers trying to sort out how much latent buying power remains among investors. Through this lens, the S & P 500′s first 5% setback in seven months, culminating a week ago Friday, was a big help in shaking out anxious investors, resetting investor sentiment and testing the key fundamental premises that have animated the bull market. Was that all that was needed to refresh a market uptrend that had grown pretty overheated with speculative momentum, complacency about the macroeconomic picture and low-quality-stock leadership into late October? Warren Pies, founder of 3Fourteen Research, last week upgraded equities to an overweight in part because he believes the answer to that question is “Yes.” He noted that into the third week of November, volume in “inverse” ETFs – those that profit from falling stock prices – surged above 40% of total volume in both inverse and leveraged-long ETFs. This has only happened four times in the past couple of years, each one coinciding with a forceful rally near a tactical bottom in the indexes. Among other things, this suggests that retail traders as a group did not lead the way in buying the November dip and driving the five-day, nearly 5% sprint higher in the S & P 500 through Friday, which turned a 4.5% intra-month loss to a small gain for November. .SPX 1M mountain SPX 1-month chart (Most likely the nasty tailspin in bitcoin from $124,000 to around $80,000 at its recent low, left retail portfolios in no position to add more risk aggressively. Bitcoin correlates more closely with shares of unprofitable tech companies than with any macro indicator or other asset market.) Along with sharp retrenchments by hedge funds that use systematic strategies based on volatility and momentum, the crescendo of interest in inverse ETFs prompted Pies to call for further upside from here: “Three big buckets of investors— retail, vol-target funds, and CTAs— derisked during the selloff. On the other side of the ledger, corporations are gearing up to buy the market into year-end” by flexing their share-repurchase budgets. This kind of seasonal reasoning and supply-versus-demand case for expecting a further rally makes sense at the essential level, where prices are purely a function of the relative urgency of buyers and sellers. Still, on a more structural level, U.S. equity allocations by private investors have rarely been higher, based on data from Bank of America’s private-client group, the Federal Reserve and other sources. And keep in mind that we heard similar talk of a “year-end chase higher” a year ago as the S & P 500 emerged from a similar pullback in late November. Yet that late-2024 comeback rally peaked a week into December before a sloppy three-week retreat into the close of that year. Those disclaimers aside, the tape action itself has been reassuring and largely in keeping with how stocks have behaved in the months following 15%-or-greater corrections such as the S & P 500 suffered from February into April. Strategas Research plotted the current recovery path against the average and median recovery trajectories from all prior such setbacks. Note the 2025 performance is better than the norm, though typically around this point the advance at least starts to flatten out. Reviewing the sturdy finish to November this year after a three-week gut check, Tony Pasquariello, head of hedge fund coverage at Goldman Sachs, observed that “given the starting point of some scorching rallies in October, and, for as high-velocity as November was, the fact that S & P finished this month in the green is notable.” To go a step more granular, the S & P 500 proved resilient in a month when Nvidia fell 12.5%, something not many would likely have predicted four weeks ago. It’s as if the market heard the constant complaints that its run to a record high looked “too narrow” and too focused on the same AI winners and responded by coming back from a three-week stress test with a series of very broad rally days not led by the usual “Magnificent Seven” favorites. That said, the amount of market cap being accumulated and disgorged daily by the massive tech platform companies isn’t entirely comforting. The market’s attempt to discern relative winners and losers, rather than indiscriminately reward every company involved, is an admirable, necessary exercise. But Alphabet going from “AI victim” to “presumed winner” while adding nearly $2 trillion in market capitalization over seven months’ time might also reflect an erratic mixture of fickleness, desperation and herding among investors. The Street’s official play callers appear unconcerned by such extreme mood swings, or by much of anything, as they project ahead into next year. About a dozen Wall Street strategists have set their end-of-2026 S & P 500 targets. All of them see at least some further upside, with the median target of 7,500 and the average near 7,580 bracketing a 10% climb from Friday’s closing level. Not wildly optimistic, especially given consensus forecasts for around 13% S & P 500 earnings growth next year. But as these things go, a 10% collective projection qualifies as rather upbeat – the average strategist target has been at or below the index level most of this year. And, as the past few weeks have shown, attitudes have a way of overshooting and eventually throwing investors off-balance, even in what’s generally been a sure-footed bull market.
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