How Long Will the Stock Market Rally? At Least Until New Year’s.

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It doesn’t get any better than this for the stock market—and that means it’s time to bet on a rip-roaring rally into the end of the year.

Everything went right that could have gone right this past week. The Federal Reserve did exactly what everyone thought by announcing plans to start winding down its bond-buying program but insisting that it would leave interest rates unchanged. The Bank of England, surprisingly, left rates unchanged. And October’s jobs report was stellar, showing a pickup in private-sector hiring and a big drop in the unemployment rate.

It didn’t stop there. Covid continued to fade into the background, at least as a market driver, after the Centers for Disease Control and Prevention recommended that children ages 5 to 11 get vaccinated and

Pfizer

(ticker: PFE) announced that its antiviral appeared to work better than

Merck
’s
(MRK), based on preliminary data. Even the bipartisan infrastructure plan seemed headed for a vote in the House around the time this column was written, something that wasn’t a given a week ago.

The stock market loved it. The

Dow Jones Industrial Average
rose 508.39 points, or 1.4%, this past week, while the

S&P 500
gained 2%, and the

Nasdaq Composite
climbed 3.1%. The small-cap

Russell 2000,
up 6.1%, left them in the dust.

The market has come a long way from the correction fears of September. Back then, everything that could go wrong was going wrong. Higher input costs and rising wages were supposed to hit corporate profit margins, economic growth was supposed to stagnate while inflation soared, and the market was “due” for a big pullback. Instead, after a 5% drop in September—the S&P 500’s first in 227 trading days—the index has rallied 9.9% and is now up 3.5% from its Sept. 2 high. Is that a reason to sell? Hardly. “[There’s] probably a good bit of performance chasing going on as well,” writes Chris Senyek, chief investment strategist at Wolfe Research. “We see more upside from now to year end.”

It’s been a strange rally, however, observes Christopher Harvey, U.S. equity strategist at Wells Fargo Securities. On the one hand, the S&P 500’s rise has been driven by its largest stocks—

Tesla

(TSLA) and

Nvidia

(NVDA), among them (more on that later).

As a result, the

SPDR S&P 500
exchange-traded fund (SPY) has gained 5.1% during the past three weeks, outpacing the

Invesco S&P 500 Equal Weight
ETF’s (RSP) 3.6% rise. It’s a different story across the indexes, however, with the

iShares Russell 2000
ETF (IWM) gaining 7.4%% during the past three weeks to outperform the S&P 500.

Rallies can occur in both, says Harvey, who expects the stock market to head higher thanks to the Fed’s easy-money policy, strong corporate margins, and increasingly bullish investors, among other factors. “In recent days, investors have been talking to us about downside protection,” Harvey writes. “We think [portfolio managers] would be better served focusing on upside.”

At least until the end of the year.

Write to Ben Levisohn at Ben.Levisohn@barrons.com