December 4, 2024: Rising Tide Is Lifting All Boats

U.S. stocks have delivered strong returns over the past month, with the stocks in the Russell 3000 Index posting an average gain of 9.87%.¹ Robust corporate earnings, supported by a strong economy, were a key driver of this performance ahead of the U.S. presidential election. Following the election, the rally has broadened as markets anticipate an easing regulatory environment and potential tax cuts. While these factors are likely to support U.S. stock returns and earnings into next year, a closer look suggests a growing complacency in valuing company fundamentals.

Sustained earnings growth and profitability are vital for long-term stock performance. However, over the past month, the market appears to be valuing profitable and unprofitable companies equally—if not favoring the latter. Stocks with negative return on equity (ROE) have delivered returns similar to those with the highest ROE. While such episodes of strong performance by companies with weak fundamentals are not uncommon, they often lack durability.

The broadening rally is a positive development for what has been a concentrated market. Even so, as guardians of wealth, maintaining a disciplined focus on fundamentals is not optional. Ultimately, the market will anchor stock returns to the strength of underlying fundamentals.

¹ Data from Bloomberg for commentary and chart.

Weekly Market Update: December 4, 2024