Snap-back trade likely in the new year, says NewEdge’s Cameron Dawson

With the fate of the Santa Claus rally hanging in the balance, what's in store for stocks heading into 2025? Let's ask our panel. New Edge Wealth's Cameron Dawson, Wealth Enhancement Group's Ayako Yoshioka, and BMO's Yang Yuma. Welcome to all of you. Cameron, the 10-year yield, is that a headwind for stocks? It certainly should be, given the fact that stocks are trading at 22.3 times forward earnings. But we're not certain if the 10-year can continue this momentum higher, simply because it's diverging from economic surprises so much. So economic data has been coming in a little bit weaker than expected, like those continuing claims, but 10-year treasury yields keep pressing higher. Eventually that gap will close, meaning that either data has to come in better to support these higher yields, or yields will fall. So maybe stocks can get a little bit of a breather as we get into 2025, if yields start to turn lower. Yang Yu, do you subscribe to the seasonal stuff? We are in the middle of this Santa Claus rally. Again, we're a little bit higher today, I guess higher since Tuesday. Final five trading days of the year, plus two into the new year, which will tell us, I guess, the whole fate of the rest of the year. Is that true? Next year. Thanks, Derek. Great to be here. I do think there's some reality behind some of the seasonal tendencies that play out, but it's important to remember, these are just tendencies. These are not deterministic. If you take a multi-year, looking back decades, you can see some changes in the averages over certain periods, certain months, surrounding certain holidays, but you really don't want to hang your hat on that. You really want to look at what are the catalysts at any given time? What are the dynamics that are taking place in the market? And we think there's more likely to be a bit of a dose of caution up running up into the inauguration. So we don't think there's a major reason for a significant pullback here, but we don't see the catalyst playing out for a few more weeks still. So you both kind of sound a little cautious. Aya, where are you right now, watching seasonals, watching yields, and what you think it means for stocks for the rest of the year into next year? Sure. Thanks, Sarah. So, you know, for positioning wise, I think, you know, as we look into 2025, everybody's looking into January and how things might change relative to how things have been so far in December and all of 2024. And typically, you get a little bit of a reversal in January. And so we might see some of that. And I think it would be healthy for markets to have a little bit of a pullback in January. You do start to get some of those dogs of the Dow to start work in January. So we might start to see that in 2025. I mean, the divergence, I feel like we can't talk about the market heading into the end of the year without the divergence, which has only gotten more intense in December between the magnificent seven large cap stocks, Cameron, and the rest of the market, which everyone had hoped for the broadening outtrend. It's not playing out that way in December. And I do wonder which way it goes in the new year. Yeah, so much for that broadening out, because in the last month alone, you've seen the mag seven up 13 percent and the average stock, the equal weight index is down nearly five percent. So almost a 20 percent divergence in just the last month, which we don't think is sustainable. But a lot of it can be explained by earnings. Earnings for the mag seven are one of the few places in this market that you're actually seeing earnings revisions move higher. They're up in the last six months. They're up six percent in the last month, which just suggests that the rest of the market is seeing earnings deterioration, at least in the forecast. So in order for the average stock or the broadening out for the market to actually deliver, we think you have to see better earnings revisions from that part of the market. And we're just simply not seeing yet, which speaks to this narrowness. But do you think we'll see it? I mean, is it time to to rotate? We think that at least we'll get a snapback trade at the beginning of the year, just saying that it's likely that given the fact that things like momentum and beta are all in the 95th to 99th percentile of outperformance, that those things don't persist forever. So we do think that you'll get a value, a kind of dogs of the dogs snapback at least for a couple of weeks. But then we get into earnings season for the fourth quarter by the time we get to late January. And that will be the first test of the everything else rally to see if those names can deliver. If you look at forecasts, they're expected to have a huge acceleration in the fourth quarter for the everything else part of the market. So if those names don't deliver in that fourth quarter earnings season, we'll be back to this narrow market after a short snap.