What a difference three weeks makes in this stock market. In late October, the 10-yr note yield was pushing 5.00%, the S&P 500 was on the brink of breaking below 4,100, and the CBOE Volatility Index (VIX) was north of 23.00.
Now, the 10-yr note yield sits at 4.44%, the S&P 500 is at 4,514, and the CBOE Volatility Index is under 14.00 at 13.80.
It was quite a reversal. with the S&P 500 surging over 400 points in just 14 sessions or nearly 10%, while the Nasdaq 100 (NDX) exploded for more than 1800 points or 13% during the same time period.
The implication is that investor sentiment has taken a strong turn for the better in the past three weeks, largely because interest rates have come down on the assumption that the Fed is done raising rates and is apt to cut rates in the first half of 2024.
Higher stock prices are usually the result of the improved sentiment, but accompanying those higher stock prices are higher valuations. Three weeks ago, the S&P 500 was trading at a 17.1x forward 12-month earnings, or a slight discount to its 10-year historical average (17.5x), according to FactSet. Today, it trades at 18.7x forward 12-month earnings.
The S&P 500 doesn’t trade at a super-rich valuation, but it’s up there. Just about everyone regularly following the market this year knows why. Apple , Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA and Tesla (The Nasdaq 100 “Generals”) are also in the market-cap weighted S&P 500 and have certainly raised the valuation bar, but they have typically sported premium valuations.
If anything, there is concentration risk in these seven names. Investors have flocked to them because they are market leaders with healthy financials. They have flocked to them, because, for the most part, they keep delivering results that validate their must-own status. Fund managers have flocked to them, because everybody else has, and the risk of underperforming “the market” is too great not to own them.
Of course, therein lies the risk for these stocks and “the market.” If their fundamental story changes for the worse, their stock prices will, too, and perhaps in a material way.
With the NDX & SPX at or near KEY resistance and forming 4 day bull flag type consolidations, it appears they may be poised to pop and run even further. The previously trailing Transportation and small-cap indices also surged last week playing catch up to confirm the move in the NDX & SPX. a positive technical occurance. Market momentum is strong and a year-end extension rally may very well occur, but a failure to do so immediately next week could result in at least a pullback or further consolidation first.