One of the strongest months in US equities in 20 years One of the strongest months in US equities in 20 years One of the strongest months in US equities in 20 years

One of the strongest months in US equities in 20 years

Equities 4 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  US equities ended November on a strong note delivering one of the strongest monthly gains in 20 years as US bond yields came lower and investors doubled down on Fed interest rate cuts for next year. The best performing equity theme baskets were payments and new biotech as lower interest rates and strong earnings from Adyen and Block lifted sentiment. One key risk to consider is that rising US equities have pushed equity valuations back into danger zone with mixed expected equity return outlook.

The land of milk and honey

Last month became the sixth strongest month for S&P 500 in the past 20 years. The key drivers were 1) strong earnings releases from technology companies not at least Nvidia, 2) lower than estimated inflation readings in the US and Europe, 3) a 60m bps decline in the US 10-year yield, 4) two additional Fed rate cuts priced into SOFR futures, 5) and 6) collapsing implied volatility in options markets. It was almost the perfect set of conditions for an equity rally. However, underneath the calm surface of this rally lies an inconvenient truth which is that S&P 500 index weight concentration has reached a new all-time high. This is a sign that the US equity market is being carried higher by an increasingly narrower set of stocks which from a risk perspective is not good.

S&P 500 futures | Source: Saxo
US 10-year yield | Source: Saxo

The rebounds in payments and new biotech themes

Falling bond yields have lifted themes that previously were hit by rising bond yields, except for the theme baskets related to the green transformation. The two best performing theme baskets in November were Payments and New biotech up 28.9% and 18.2% respectively. The payments industry has hard some tough years in public markets but in November sentiment improved dramatically with Dutch payments firm Adyen revealing an outlook at their Investor Day presentation that was better than expected. Another strong performer was Block up 57.6% in November on better earnings results and surprise upside revision to its guidance.

Tesla share price | Source: Saxo
Block share price | Source: Saxo

US equities keep defying gravity on valuation

The strong rally in US equities has also pushed US equity valuations back into high territory with one of the valuation metrics, free cash flow yield, falling to just 3.65% compared to the long-term average around 4.9%. The current valuation level has historically delivered mixed future returns after adjusting for inflation (-3% to +3% annualized) so the long-term risk-reward ratio is not super attractive in equities at this point. Investors sitting on strong gains this year should consider reducing the exposure a bit and increasing the exposure to the short-term bonds in case the economy begins surprising to the downside.


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