What are the highlights of the last two trading days of 2024? Can the U.S. stock market close perfectly?

According to Zhitong Finance APP, the global market is about to welcome the last two trading days of 2024. If there are no surprises, U.S. stocks are expected to achieve another strong year of gains.

The NASDAQ Composite Index has once again led the way in 2024, having risen over 30% so far, while the S&P 500 Index has increased by over 25% and the Dow Jones Industrial Average has risen by 14%.

Due to the holiday, investors will face a shortened trading week with limited market news. The market will be closed on Wednesday for New Year's Day, and no major companies will report quarterly earnings.

In terms of economic data, the latest housing price and sales data, as well as manufacturing activity data, are expected to highlight the sluggishness of this week's economic indicators.

Where is the "Christmas Rally"?

The market is about to enter the third day of the highly anticipated "Christmas Rally," which statistically is one of the most sustained seven-day upward trends for the S&P 500 Index in the year.

However, this year the stock market does not seem to be exhibiting a festive atmosphere. Last Friday, all three major indices faced selling pressure, with the NASDAQ Index dropping nearly 1.5%.

Adam Turnquist, Chief Technical Strategist at LPL Financial, stated that since 1950, the S&P 500 Index has risen by 1.3% during the seven trading days starting from December 24, significantly higher than the usual seven-day average of 0.3%. History shows that if the "Christmas Rally" does occur and the S&P 500 Index rises during this period, January is typically a month when the benchmark index achieves positive returns, with an average return of 10.4% for the rest of the year.

According to Turnquist, when the S&P 500 Index has negative returns during this period, January usually does not end with a decline, but the upcoming average return for the year is only 5%. This year's Christmas Rally will end on Friday, January 3, and on the third day of the Christmas Rally, the S&P 500 Index's decline is less than 0.1%.

Although history may serve as a warning signal, it is worth noting that last year's Christmas Rally did not materialize. January also started poorly. Nevertheless, the S&P 500 Index is still expected to rise over 20% this year.

Higher for longer

As the market digests the recent messages from the Federal Reserve, indicating that interest rates may remain elevated for longer than investors expect, bond yields have been soaring. In December alone, the yield on the U.S. 10-year Treasury bond has risen by over 40 basis pointsCurrently, the 10-year U.S. Treasury yield hovers above 4.6%, approximately the highest level in seven months. Equity strategists believe that maintaining interest rates at a high level may begin to weigh on stock market performance.

Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, stated in a recent video sent to clients, "I think a 10-year U.S. Treasury yield of 4.5% or higher will pose a problem for the broader market."

However, Kantrowitz further pointed out in an interview that any economic data leading to a decline in interest rates could be a welcome signal for the stock market.

On December 18, Kantrowitz said, "In the past few years, real market declines have only occurred due to rising interest rates or inflation concerns. I believe this is the new normal going forward. Market adjustments will come from interest rates remaining at high levels, rather than slower economic growth or higher unemployment rates."

Fundamentals

Scott Chronert, a U.S. equity strategist at Citigroup, wrote in a report to clients last Friday that despite a recent market pullback since the Federal Reserve meeting on December 18, the landscape entering 2025 "has not really changed."

Stock valuations remain high. According to FactSet data, the earnings of S&P 500 constituent companies are expected to grow by about 15% year-over-year, which will impress investors. The market generally expects U.S. economic growth to remain resilient.

"Overall, investors seem to have an optimistic outlook on the U.S. stock market," Chronert wrote.

This has driven an increasingly bullish market sentiment as measured by the Citigroup Levkovich Index. The Levkovich Index considers factors such as investor short positions and leverage to determine market sentiment, and it currently stands at 0.62, above the optimistic line of 0.38. Above the optimistic line, the likelihood of positive forward returns is generally lower due to the market appearing to be in a tense state.

Currently, this has not shaken Chronert's overall confidence in the U.S. stock market. He noted that the "fundamentals" driving the market rebound remain intact.

However, strategists believe that if catalysts emerge that challenge the bull market theory for 2025, the tense sentiment and valuations could indeed make the market rebound more fragile.

"Overall, this pattern, combined with a lack of real adjustments for some time, does make the market more susceptible to increased volatility," Chronert wrote. "If the fundamentals hold, we will be buyers on any pullbacks in the S&P 500 in the first half of the year."”