Week of Dec 01 2024

The earnings backdrop presents a nuanced picture, with LSEG data showing 76.3% of companies beating Q3 estimates with an average surprise of 7.6%. Forward estimates suggest acceleration into 2025, with projected growth of 14.3%, led by Technology and Healthcare sectors. However, this comes against an elevated forward P/E of 22.8x, significantly above historical norms and reminiscent of levels seen prior to previous market corrections. Yardeni's analysis particularly highlights the risk to these multiples if bond vigilantes react adversely to Trump's proposed fiscal policies.

Several critical technical levels are being monitored: the SPX 6050 strike represents a key gamma level, while bond market participants are watching the 10-year yield around 4.50% as a potential trigger point. For currency markets, the euro approaching parity with the dollar could mark a significant inflection point. The NYSE high-low spread above 14.5% suggests broadening market participation, historically a positive signal for sustained advances.

Left tail risks center on inflation resurgence, with particular focus on Trump's proposed 25% tariffs on Mexico/Canada imports potentially adding 0.9% to core PCE. The bond market's capacity to absorb expanded deficits while maintaining orderly conditions remains a key concern, especially given the elevated starting point for government debt levels. Right tail possibilities include a "Roaring 20s" scenario outlined by Bessent, driven by productivity gains and sustained above-trend growth without corresponding inflation pressure.

Near-term catalysts include the November nonfarm payroll report on December 6th, and the December 18th FOMC meeting and associated forward guidance, where the market currently prices a 53% probability of a rate cut. The January-March period could prove particularly volatile as markets digest the implementation of Trump's policy agenda, especially around trade and immigration policies. The combination of technical supports and fundamental challenges suggests a continued grind higher into year-end, but with increasing risks of a more substantial correction in early 2025 as policy impacts become clearer.