This week in the markets: Trump Trade turns to Santa Rally

Stock markets continue to rally on a broad front. A third of big US shares hit a 52-week high last week. Three quarters of shares are in an uptrend. Even the friendless FTSE 100 had its best week since May. The Trump Trade is morphing into the annual Santa Rally.

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Where next for markets?

Bullish sentiment is showing up in a string of new records. Both the top 10 and the remaining 490 stocks in the S&P 500 are hitting new highs. And the equal-weighted index has broken decisively above its 2021 peak.

The good news is that while the market is bouncing against the top of its long-term trend, it is far from the excessively overbought level that typically signals a reversal. Fundamental measures look supportive too. While valuations are high, they are underpinned by strongly improving corporate earnings. These rose 9% in the third quarter results season, with more of the same pencilled in for next year.

Attention is on the impact that Donald Trump’s renewed America First doctrine will have on financial markets. A cocktail of tax cuts, tariffs and lower immigration promises higher inflation and so higher for longer interest rates. That will be a headwind but higher growth at the expense of other regions like China and Europe promises to keep US leadership intact.

Inflation in focus

Ahead of next month’s rate-setting meetings on both sides of the Atlantic, this week’s inflation data will provide some clues as to the likely path of monetary policy. In the US, Wednesday brings the Fed’s preferred inflation measure - the Personal Consumption Expenditures (PCE) index. As Fed chair Jay Powell warned last month, inflation has been ‘bumpier’ than he expected and the core PCE reading this week is forecast to hit 2.8% well above the Fed’s target inflation rate.

That’s resulted in a sharp recalibration of expectations about interest rates. A month ago, the futures markets were pointing to a 50% chance that interest rates would be a full percentage point lower by next June. Now that outcome is assigned just a 10% probability.

It’s a very different story in Europe. Here inflation remains a threat - Friday’s print is expected to show a sharp rise in the rate of price rises in October to 2.4% (1.8% in September). But on this side of the pond rising prices are coupled with a severe economic slowdown and the fear of ‘stagflation’ is real. A rate cut looks nailed on next month, the only question is whether it will be the usual quarter point reduction or a jumbo half point cut.

2025 outlook: divergence

The growth differential between the US and Europe is already feeding through into forecasts for financial markets in 2025. Fidelity’s house view is that next year will see a continuation of US ‘exceptionalism’. Stronger growth, coupled with Trump’s protectionist agenda should keep American shares in pole position, despite the much higher valuation of Wall Street.

The outlook for US stocks contrasts with a more challenging picture in Europe where profit warnings from industrial companies and car makers, together with weak sales on the consumer discretionary front, provide a weak backdrop for a region facing possible tariffs in the US. There’s lukewarm enthusiasm for China, too, where government support points to an incremental recovery in battered Chinese share prices. In Asia, the most favoured market is Japan, where reflation, reasonable valuations and governance reforms point to a decent year ahead for Japanese shares. The UK is struggling to kick start a growth agenda under the new government but the stock market is one of the world’s cheapest.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.