Optimism is growing that the recent four-day rally in US equities signals a strong finish to the year. Warren Pies from 3Fourteen Research has increased his equity allocation to 60 per cent, citing reset sentiment following a recent sell-off. According to Pies, this sell-off presents an opportunity to overweight equities heading into the year’s end. 3Fourteen Research is an investment research firm providing insights and analysis on market trends and investment strategies. Their Sentiment Composite shifted from extreme optimism in late July to extreme pessimism recently.
Pies characterised the recent sell-off as “retail capitulation,” suggesting the S&P 500 has likely found a floor absent a significant fundamental catalyst. Despite the overall modest selling pressure, the impact on the median stock felt more akin to a 10 per cent correction. Pies highlighted that the selling wasn’t limited to small investors, noting that volatility-based traders and professional money managers also reduced their risk exposure during this period.
A primary driver behind Pies’ expectation of a December rally is an anticipated surge in corporate buying activity. He also anticipates that the Federal Reserve will implement interest rate cuts in December, maintaining an easing bias to address the economic challenges faced by lower- and middle-class households. Pies believes that the Fed will be willing to accept higher equity prices as a consequence of these actions. The anticipated rate cuts are expected to further stimulate corporate buying and investor confidence, fuelling the predicted year-end rally.
