Why there's a clear path for the Santa Rally

Investing.com -- The much-anticipated Santa rally seems set to continue, driven by a combination of "Goldilocks" economic data, supportive Federal Reserve policies, and solid earnings results, according to Sevens Research.

Key economic indicators released last week offered a balanced view of growth and stability, according to the firm.

They noted that the ISM Manufacturing PMI improved, signaling reduced contraction, while the Services PMI cooled slightly to mitigate fears of economic overheating.

Meanwhile, the latest jobs report highlighted steady labor market growth, with around 150,000 jobs added per month in October and November.

The Federal Reserve remains committed to easing monetary policy, with Sevens stating that commentary confirmed the likelihood of a 25-basis-point rate cut in December.

They added that corporate earnings, particularly from tech and consumer sectors, further buoyed sentiment with solid results. This trifecta of growth, falling rates, and stable earnings has propelled the S&P 500 to new heights, now above 6,000.

Looking ahead, the "clear path" for the rally into year-end could face challenges in early 2025, says Sevens.

The "optimistic set up has, as usual, been taken to limits by investors," writes the firm.

They explain that elevated valuations (22x forward earnings) suggest potential vulnerability to policy or economic disappointment.

Risks are said to include policy gridlock in Washington, geopolitical tensions, and tariff threats under the incoming Trump administration.

However, Sevens Research maintains an optimistic medium-term outlook. As long as economic growth persists, rate cuts continue, and corporate performance remains stable, any volatility may provide buying opportunities. Cyclical sectors, including financials, industrials, and energy, are well-positioned to benefit from these dynamics.

Sevens concludes: "The path to a continued rally into year-end is clear, but at the same time we should all be prepared for 2025 to start with some volatility around headlines from potential policy disappointment, a possibly slightly slower pace of rate cuts in 2025, and geopolitical saber rattling and/or tariff threats."

Source: Investing.com