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Another week, another record: since November 5, the S&P 500 and Nasdaq have gained 5.8% and 8.2%, respectively, bringing their year-to-date growth to an impressive 28.4% and 34.5%.
Market sentiment remains exuberant, with little concern about potential overvaluation, even though the S&P 500’s price-to-earnings ratio (P/E) has surpassed 22 points, its highest level in three years.
Should we be concerned about an impending crash?
Indeed, Warren Buffett warned of a potential financial crisis next year, but that doesn’t mean it’s inevitable. A significant economic disruption would likely need to occur for this bull run to reverse.
For now, the data looks solid.
In particular, U.S. real GDP grew at an annualized rate of 2.8% in the third quarter of 2024, according to the “second” estimate, a solid result considering the context of high interest rates.
The labor market also provided reassurance. In November, non-farm payrolls increased by 227,000, surpassing the forecast of 220,000 and easing recession concerns, at least for now.
Meanwhile, the slight uptick in the unemployment rate to 4.2% has bolstered expectations for a 25 bp Fed rate cut on December 18. The upcoming inflation data will be key to solidifying this outlook.
Finally, the OECD raised its U.S. growth forecast, projecting 2.8% for 2024 (up from 2.6%), 2.4% for 2025 (up from 1.6%), and 2.1% for 2026. If these projections hold, there’s little reason for a downturn.
What are the concerns?
For the second year in a row, the S&P 500 is set to gain more than 20%. The only other time we saw similar three-year streaks was during the dot-com bubble, and then things didn’t end well.
While economic growth may keep markets buoyant for now, any deterioration-whether from escalating geopolitical tensions, trade wars, or ballooning U.S. debt-could trigger a sharp and painful correction.
That said, Goldman Sachs, Morgan Stanley, etc. remain optimistic, with some forecasting the S&P 500 could climb to 7,000 within the next 12 months. Of course, as always, everything is subject to change…
