Wharton professor Jeremy Siegel predicts that the stock market is on the brink of a year-end rally, bolstered by the nearing peak of bond yields and attractive valuations. November, historically a strong month for the market, is expected to continue this trend.
According to Siegel, bond yields are approaching their zenith, marking the end of a historic sell-off that has caused concern among investors in recent months. The forthcoming Federal Open Market Committee (FOMC) meeting is not anticipated to bring significant changes, as the Federal Reserve is likely to maintain the current interest rates.
While the recent stock market sell-off raised doubts about 2023 gains, historical patterns suggest that investors are entering a seasonally robust period that could drive equities toward a year-end rally. Jeremy Siegel believes that several factors will contribute to this positive outlook.
“In the last 25 years, November is the second-best month of the year, just slightly behind April,” Siegel stated during a CNBC interview. “So I do think we’re going to have a year-end rally coming up.”
“I think valuation is persuasive,” he added. “I actually think growth is going to be better next year, and I think that the higher real interests we’ve seen is optimism about growth in 2024. And that’s going to pressure the stock market because it has to discount those higher earnings, but I think those higher earnings are going to come through.”
The Federal Reserve’s meeting this week is closely monitored, but Siegel believes it is unlikely to provide new information to investors. Notably, the Fed has raised rates 11 times since March 2022, with two pauses, including the most recent one in September.
“The Fed is certainly not going to do anything on Wednesday, and they’re going to leave the door open,” Siegel commented.
The recent decline in stocks was primarily triggered by Fed Chair Jerome Powell’s announcement that rates would remain elevated for an extended period, exceeding market expectations. Consequently, Treasury yields surged, leading to a historic market correction rivaling some of the most significant downturns in history.
However, Siegel now suggests that yields are reaching their peak, stating, “I think we’re pretty near the top of the 10-year, maybe five and a quarter.” He referred to a potential cap on the 10-year Treasury yield at 5.25%. This figure is notably distant from the yields observed in the 1980s, and Siegel pointed out, “that’s the only time we ever saw something like single-digit [price-to-earnings] ratios.”
The S&P 500 has gained 7.7% year-to-date and approximately 16% since its low point in October 2022. While valuations of the so-called “Magnificent Seven” stocks may seem high, Siegel highlighted that valuations in the rest of the market remain at historically low levels.
In summary, Jeremy Siegel’s analysis suggests that the stock market is well-positioned for a year-end rally, driven by the proximity of bond yields to their peak and attractive valuations, despite recent market fluctuations.
