Stocks set to climb wall of worry heading into Christmas
Rapidly cooling volatility on Wall Street creates an opportunity for investors, as experts forecast a Christmas bull run.
Ladies and gentlemen, I’m predicting a bull market heading into Christmas.
An obvious peak in volatility last week said a lot about what’s happening in US stocks.
It’s not often the VIX volatility index spikes to a six-month high of 29 per cent on Friday – well above its long-run average of 19.5 – then closes 4.5 percentage points lower on the day at 20.8 per cent.
Those sorts of tops usually take more than a day to form. Volatility is still fairly high, but Friday’s reversal probably left many traders stuck with excessively bearish views.
Of course, volatility could spike more seriously, as it did in April after a “false” signal of calm in mid-March. But that would probably need a risk-off event of similar magnitude to US President Donald Trump’s “Liberation Day” tariff announcement of April 2.
US stock market valuations are undoubtedly stretched. The forward PE of the S&P 500 remains near its highest levels since the pandemic – when unprecedented stimulus ruled – and before that the dot-com boom. But professional investors are well aware that the global stock market, led by the US, is entering what’s normally its most bullish time of year
Barring a breakdown in US-China trade talks and sharply higher tariffs, skeletons coming out of regional bank loan books, a protracted US government shutdown or a hawkish pivot by the US Federal Reserve, a year-end rally has started and stocks are set to climb a “wall of worry”.
JP Morgan’s global head of market strategy Dubravko Lakos-Bujas remains cautious in the near term given elevated investor positioning and rich valuations. But his medium-term outlook for equities remains constructive. He sees the S&P 500 rising about 5 per cent – from 6,604.to 7,000 points by early 2026.
Crucially, the tariff impact on US companies has been manageable so far.
The US is collecting $US350bn in tariffs at an annualised run rate.
But only 14 per cent of S&P 500 companies have “high tariff sensitivity”, mainly in consumer discretionary, industrials and health care. And these companies are implementing mitigation strategies. Some 72 per cent are reshuffling supply chains, 69 per cent are raising prices, 41 per cent are cutting costs and 21 per cent are managing inventory better.
The realised tariff rate has also been much lower than expected – around 10 per cent versus expectations of 16 per cent. This has helped limit the hit to profit margins.
President Trump is expected to meet Chinese President Xi Jinping at the APEC summit later this month, where a deal could be reached ahead of threatened 100 per cent tariffs on Chinese goods, due to take effect on November 1.
While any deal is likely to be limited in scope, it could help reduce uncertainty.
There’s also the possibility of legal challenges to the tariffs. Trade and legal experts estimate a 70 to 80 per cent chance of the Supreme Court ruling against Trump’s use of emergency powers for tariffs by year-end. If overturned, the $US174bn collected so far this year could become eligible for refunds – a net positive for small businesses and multinationals.
Fund flows also tell a positive story. Citi reports equity funds saw $US28bn in inflows in the week of October 15, up from $US20bn the previous week, mostly into the US.
Notably, passive US equity funds saw strong inflows while active funds saw outflows – a sign retail investors are buying the dip.
But the buying isn’t just happening in the US.
Asia ex-Japan funds, driven by strong China demand, saw $US13bn in inflows.
Closer to home, Macquarie strategist Matthew Brooks says Australia’s AGM season is off to a good start, with net positive guidance surprises.
Where there have been guidance changes, they’ve tended to be positive rather than negative.
Brooks says the ASX “earnings recession” of the past three years is finally over.
Since August, the aggregate ASX earnings per share forecast from Macquarie analysts has been revised up 420 basis points for financial year 2026 and 670 basis points for fiscal 2027.
Resources are driving the upgrades, with fiscal 2026 earnings estimates up nearly 12 percentage points due to higher commodity price forecasts. Banks have also seen upgrades of more than 300 basis points for both years due to lower bad debts and higher activity levels.
Macquarie’s Macro Velocity signal remains supportive for equities, with global momentum continuing to accelerate despite tariffs.
This global cyclical strength is positive for shares, as it suggests the earnings upgrade cycle can continue.
The path higher won’t necessarily be smooth.
US-China trade uncertainty persists, US corporate share buybacks are constrained as companies enter peak blackout windows, and US labour market risks remain elevated.
But if a correction does materialise, large institutional investors who have been sidelined since April are likely to buy the dip, alongside with corporates and retail investors, according to JP Morgan’s Lakos-Bukas.
“In our opinion, a correction would be healthy as it would remove some of the froth in the market, setting the stage for the next phase of the rally,” he says.
More Coverage
To join the conversation, please log in. Don't have an account? Register
Join the conversation, you are commenting as Logout