Stocks are entering second year of a bull market that could spell 12% gains, BMO says

And despite the potential drag of higher interest rates and doubts about the overall resilience of stocks, the S&P 500 in November eclipsed 4,550, moving 27% above its bear-market low, a positive sign for a second year of a bull market, according to BMO Capital Markets.

Also, over roughly the past 60 years, once the stock market climbs 20% above a bear-market low, it almost always has been followed by gains in the next 18 months, according to BMO Capital’s strategy team.

“The exception came during the early 2000s, when the market was unwinding from the collapse of the tech bubble and the aftermath of the 9/11 terrorist attacks — periods that do not resemble the current market environment, in our view,” a team led by Brian Belski, chief investment strategist at BMO Capital Markets, wrote in outlook published Monday.

Instead, the team expects the S&P 500 to end this year near its current 4,550 level, and for it to produce an 11.9% gain by the end of 2024, which would put the index at 5,100.

Belski’s team thinks worries about shrinking corporate profit margins have been overblown, along with the toll of the Federal Reserve’s policy of higher interest rates and recession fears, given the labor market’s resilience.

The team also found that while stocks performed better when the 10-year Treasury yield was below its three-year moving average, equities also gained an average of 8.7% over 12 months when yields were above-average.

The 10-year Treasury yield
BX:TMUBMUSD10Y
fell to 4.388% on Monday, near its lowest in two months, after briefly climbing in October to about 5%, a 16-year high.

“More important, should yields begin to decline from current levels, our analysis suggests that the market can deliver a double-digit gain even if yields remain above average,” the BMO team said.

Stocks took a breather from a strong November rally on Monday, though the S&P 500 still up 8.5% on the month, the Dow Jones Industrial Average
DJIA
is up 6.9% and the Nasdaq Composite Index
COMP
is headed for a 10.8% monthly gain, according to FactSet.