Market sentiment has shifted markedly over the last few weeks with major equity benchmarks set to record their best month of the year.

So far the Nasdaq Composite is up nearly 14% in November, the S&P 500 is up nearly 11% while in Europe the German Dax and the FTSE 250 mid-cap index are up around 10%.

The so-called ‘fear index’ or VIX has sunk to 13 from over 20 a few weeks ago, signaling investors are not concerned about risk in the run-up to the end of the year which has historically seen good gains for stocks.

Bullish forecasts from investment banks have also started to appear after months of hibernation. For example, on 27 November Deutsche Bank strategists issued a prediction that the S&P 500 would end 2024 at 5,100 implying a further 11% gain on the already impressive 19% increase seen so far in 2023.

The median market projection is that the benchmark index will finish 2024 around the 4,700 mark according to a Reuters poll.

Deutsche Bank’s chief US and global strategist Bankin Chadha said market perceptions for US earnings remain lacklustre. Chadha reckons 2024 S&P 500 earnings could increase 10% after factoring in a mild recession.

‘If earnings growth continues to recover as we forecast, valuations will remain well supported around the top of the range as is typical on the pricing in of a pickup in earnings growth’, explained Chadha.

The market’s change of heart is being driven by a perception that both the US and European central banks have finished hiking interest rates.

Better-than-expected US inflation data on 14 November and a slowdown in the labour market have given investors confidence that the Federal Reserve can successfully engineer a ‘soft landing’ for the US economy.

The ‘softer’ slowdown view is reflected in bond market yields, with the US 10-year treasury yield having dropped half a percentage point over the last month.

Market-implied interest rates suggest the Fed will remain on hold at its next interest rate policy meeting on 13 December and the following 31 January meeting, with interest rate cuts expected from June 2024.

Deutsche Bank is forecasting 1.75% of interest rate cuts from the Fed next year and a one percentage point cut from the European Central Bank between June to December 2024.

The current FOMO (fear of missing out) trade could yet fizzle out if investors have once again misread the Fed’s determination to keep interest rates higher for longer.

After all, while October’s inflation reading beat expectations by a smidge, at 3.2% it remains materially above the Fed’s 2% target.

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