This week looked pretty quiet, but underneath the surface the market had a lot going on.

The S&P 500 is now really close to a new all time highs. Under the surface, rate-sensitive stocks made big moves. Momentum is clearly coming back into the market as we head toward year end.

So, is this the start of the Santa rally?

The odds of a December rate cut has jumped significantly, and the market is now pretty certain we’ll get one next week.

And if there is one thing the markets love it’s cheap money. Because it makes borrowing cheaper for companies and consumers. That usually boosts spending, earnings, and overall growth. Lower rates also make stocks more attractive compared to bonds, so money tends to flow back into equities.

That’s why the Russell 2000 and small caps outperformed.

While rate cuts tend to lift most assets, they especially help homebuilders, small caps, industrials, and growth stocks. Seeing those groups lead tells us the rally is starting to broaden, not narrow.

And it’s not just about Nvidia or the Magnificent 7. November already proved that the market can hold up even when those names pull back. Even though Nvidia and others corrected, the S&P barely moved and we saw some rotation into other sectors. That’s exactly what you want to see in a healthy market.

If you take out the Magnificent 7, the rest of the S&P 500 is already at a new high. That should make it clear that the rally isn’t just big tech carrying the entire market.

Bearish responses in the AAII survey just fell below 31% for the first time in almost a year. That’s rare. It has only happened 3 other times, and in each of those cases the market moved higher afterward. It’s a sign confidence is coming back to the markets.

December is historically the strongest month for stocks. It has a better win rate than any other month, with the S&P finishing higher almost 3 out of every 4 years.

Stocks were lower last year in December. But back-to-back negative Decembers are really rare. The last time we had two in a row was 2014 and 2015, and before that you have to go all the way back to 1980 and 1981. So, the odds are in our favor for now.

The Santa Claus Rally isn’t the whole month of December. It’s only the last few trading days of the year plus the first days of January. So, the first half of December is usually choppy, and the actual rally tends to show up near the end. Hence, near-term volatility should be expected.

Strength begets more strength.

When the S&P is already up more than 10% by November, it usually keeps pushing higher. In fact, the last 16 times this happened, the final 2 months of the year were positive every single time.

The S&P 500’s YTD return of 17.8% came from:

• Earnings growth contribution: +12.2%-points

• Multiple growth contribution: +4.2%-points

• Dividends: +1.4%-points

Most of the gains this year actually came from earnings growth. About 76% of the S&P 500’s return came from profits and dividends, not just higher multiples. As long as the economy doesn’t fall into a recession, there is no reason to think that this won’t continue.

Profit growth mainly comes from 2 things: higher sales and higher profit margins.

Sales usually grow as long as the economy is growing, so if there’s no recession, companies tend to sell more. That’s the link between the economy and the stock market. Even in 2022, which was a rough year for stocks, sales still grew about 8.5% because the economy stayed strong. Earnings didn’t grow much though, because margins were hit by rising interest rates and higher costs.

Margins have changed a lot since then. They were about 12% at the end of 2019, moved up to around 12.7% by the end of 2022, and now they’ve climbed to 14.3%. That’s a record high. This big jump in margins is a major reason earnings look strong again.

One thing that stands out in this rally is what we haven’t seen yet. There hasn’t been a real wave of IPOs. In past market peaks, every kind of company tried to go public, even the ones with terrible fundamentals. That usually signs of a late-stage bull market. Right now the numbers are picking up a little, but we’re still far from any kind of hype. It’s hard to o,agome the AI rally slowing down or pausing before some big AI names actually IPO and hit the public markets.

There are two important earnings reports coming up next week: Oracle and Broadcom.

They will be very important short-term signals the market is waiting for. And Broadcom is one of the leading stocks I want to take a position in. So, I’ll be watching it closely this week.

In short:

• Markets expect the Fed to cut rates in December

• The economy still looks healthy

• Inflation data came in exactly as expected

• Underperforming fund managers need to catch up

• Momentum is returning

• Earnings continue to improve

• Stocks became oversold in November

• December seasonality is strong

All of this looks good for a good setup into year-end.

The only weak spot right now is crypto. The last 3 months have been rough for anyone holding crypto. It has bounced a little recently, but there is still no actual demand. That matters because crypto is a good sentiment and risk indicator. So we’ll be watching it closely. If crypto starts to pick up with real volume, it could be another sign that risk appetite is actually back and not just temporary.