Seasonality and positioning are still favourable for US equities and argue in favour of a year-end rally.
Christopher Dembik, Senior Investment Strategy Adviser, Pictet Asset Management.
Seasonality is historically good. The median return on the S&P 500 over the last two months of the year has averaged 5.22% since 1928. In an election year, it is even slightly higher, at 6.25% on average.
The tidal wave of share buy-backs. In our view, this is a structural support factor for US equities. They have risen sharply in recent years, reflecting the record profitability of US companies and the fact that they are taxed more attractively than dividends. US companies have gone back into open window and can/should buy back a large notional amount of their own shares between now and the end of the year. Around a quarter of the total amount of share buy-backs is attributable to the Magnificent Seven. As a reminder, US companies have authorised more than $1 trillion in share buybacks since the start of the year – the largest notional amount authorised to date. November and December are usually the months with the highest share buybacks.
In an oligopolistic stock market, size matters. The US stock market now accounts for 50% of world capitalisation – a record. The market capitalisation of the Magnificent Seven is now even greater than that of the entire European stock market. The development of ETFs, the AI revolution with its epicentre in the United States, and mimicry phenomena are leading to increased capital flows into US equities.
Flows continue to be channelled primarily into US equities. Commodity Trading Advisors have been buying since the US presidential election in order to increase their exposure to US index funds. In addition, the end of the year is generally synonymous with the deployment of cash into equities by the many US mutual funds that close their financial year in October. This is the case again this year. Since November, significant amounts have been invested in equity funds. Lastly, the uptrend in US equities is being driven by increasing flows into leveraged single-share ETFs, particularly in the technology sector.
European collection in favour of the United States. The underperformance of the CAC 40 index, heightened political risk in Europe and sharply contracting PMI indicators are fuelling an outflow of savings from European assets, particularly French assets, and inflows into products with exposure to US indices and stocks.
The Trump effect is still in full swing. The prospect of lower corporate taxation should stimulate a boom in investment in disruptive technologies such as AI, particularly for small and medium-sized enterprises. For large companies, the virtuous effect of the tax cuts is likely to be smaller, as many of them, like Nvidia, pay little or no corporation tax in the United States.
The fine performance of the stock market since January is not a brake on further gains. Statistically, since 1928, after a 25% rise in the S&P 500, performance has averaged 8.66% the following year. Performance can even approach 10% if the index gains more than 30%. We’re not far off the mark, with an increase of 26.50% since January.
A comfortable safety cushion. The amounts invested in US money market funds are at a record level of 7,000 billion dollars. Following the start of the rate-cutting cycle by the US Federal Reserve, some investors have been flocking to equities since last September in search of higher yields. And this will continue. As long as this money is available, the underlying trend in US equities will remain bullish.
Christopher Dembik, Senior Investment Strategy Adviser, Pictet Asset Management
