Sam Stovall on Market Fatigue, Year-End Rally, and Small Cap Potential

Market Volatility and Digestion

• 📈 October is historically the most volatile month of the year, with 33% more volatility than other months.
• ⚠️ Several major indices, including the S&P 500 and Russell 2000, were trading more than one standard deviation above their 200-day moving averages.
• 🎯 Many investors are appreciating and hoping for a near-term digestion of market gains due to these indicators.

Pullbacks and Year-End Rally Hopes

• 🗓️ The market has not experienced a 3% pullback or greater in the S&P 500 since April, suggesting a potential pullback is due.
• 랠 If the market resists significant downward movement, it suggests investors are penciling in a year-end rally.

Small Cap Performance and Outlook

• 🚀 Small caps recently set their first all-time high in four years, while the S&P 500 had set 89 new highs in the same period.
• 📊 Historically, when both small caps and the S&P 500 hit new highs concurrently, small caps have shown two to three times the average performance over the subsequent 90 days.
• 💰 Small caps are trading at a 35% discount to their 20-year average relative PE on forward estimates, with projected earnings growth of over 20% in 2026.

Bull Market Longevity and Earnings Growth

• 🎂 If the current bull market, originating from the October 2022 low, can pass its third anniversary, historical data suggests positive performance in the fourth year with an average gain of 13%.
• 📊 A significant concern for the current bull market is its concentration in specific areas and high overall valuations.
• 💡 An acceleration in earnings expectations is needed, as current S&P 500 earnings forecasts are still below levels anticipated for the end of 2024.