Halftime Report: Can Stocks Pull Off a Year-End Rally? (12/26/2024)

Hosted by CNBC's Frank Holland in place of Scott Wapner

Introduction

In the December 26, 2024 episode of Halftime Report, CNBC's Frank Holland moderates a compelling discussion with top investors Joe Terranova, Jim Leventhal, Bryn Talkington, and Josh Brown. The central question posed is whether stocks can mount a significant year-end rally or if the gains of 2024 are already cemented. The panel delves into market trends, the impact of rising yields, algorithmic trading influences, sector performances, and outlooks for 2025.

Market Overview

Frank Holland opens the discussion with a quick snapshot of the current market status:

• Dow Jones Industrial Average: Up by a tenth of a percent.
• S&P 500: Slightly above flat, marginal gains.
• Nasdaq: Similar to Dow and S&P.
• Russell 2000: Best performer today, up over half a percent.
• 10-Year Treasury Yield: Near 4.6%, approaching May’s highs, a level that could pressure equities.

Frank Holland notes the mixed performance and emphasizes the significance of the 10-year yield's proximity to levels that historically challenge equity markets.

Can Stocks Achieve a Year-End Rally?

Josh Brown offers a pragmatic view:

"I got to be honest, I don't assign a particularly high amount of importance to the last two or three trading days of the year. I would actually say that most people have had a great year in the markets. It's been pretty hard to not have a good year." ([02:29])

He suggests that for most investors, aggressive trading at year-end is unnecessary, as significant rebalancing is anticipated in January rather than December.

Frank Holland probes further, asking Josh about potential pressure on high-performing stocks like Nvidia and Palantir. Josh clarifies that rebalancing trades will likely occur in early January, driven by wealth management strategies rather than immediate year-end movements.

Influence of Rising Yields and Algorithmic Trading

Joe Terranova highlights the complexities introduced by rising yields and algorithm-driven market behaviors:

"Algorithms and zero dated options are dominating the daily price action." ([06:50])

He explains that the surge in 10-year Treasury yields adversely affects small caps, which have already seen a 7% decline month-to-date. Terranova warns that algorithmic trading and the prevalence of short-term options are causing market movements that may seem illogical to traditional investors.

Jim Leventhal echoes concerns about non-fundamental forces shaping market behavior, noting:

"None of that has any bearing on how I would position my portfolio going into the new year." ([10:02])

He stresses that while algorithmic influences are pervasive, fundamental analysis remains crucial for long-term investment strategies.

The January Effect and Market Rebalancing

Bryn Talkington delves into the January Effect, discussing its historical significance and potential impact on 2025:

"The first two weeks of January are the biggest two weeks of the year for money going into the market from rebalancing." ([08:09])

She anticipates continued momentum into the first fortnight of January, driven by rebalancing efforts and capital allocations. However, Talkington also warns of increased volatility in the latter half of January, potentially triggered by political events such as the inauguration.

Joe Terranova adds that the January Effect is a trend heavily influenced by hedge funds and speculative trading, reinforcing the need for investors to adopt a conservative and judicious approach during this period.

Sector Performances and Top Stock Picks

Software Sector and AI Integration

Seema Modi highlights the burgeoning software sector, driven by artificial intelligence (AI):

"Technology budgets are on the verge of increasing, driven in part by artificial intelligence." ([25:42])

Key software performers include Palantir and Salesforce, recognized for their significant year-to-date gains. Analysts predict continued growth as companies like Oracle, IBM, and Snowflake expand their AI-driven offerings.

Josh Brown reinforces this by emphasizing the attractiveness of high-growth, high-return stocks:

"These are the types of stocks that people have been selecting for all year in what's overweight. And I don't know, I don't see that changing materially in 2025." ([27:24])

He underscores the durability of this trend, while advising investors to leverage market corrections as buying opportunities.

Buyback Boom

Bob Pisani provides insights into the record-breaking share buybacks of 2024:

"Based on the estimates I'm seeing, we'll get about $947 billion in total executed buybacks this year." ([38:11])

Top companies like Apple, Alphabet, Meta, Nvidia, Exxon, Wells Fargo, and JP Morgan dominate the buyback landscape, accounting for half of the total buybacks. Pisani anticipates this trend will persist into 2025, supported by strong corporate cash flows despite a nominal 1% tax on buybacks.

Joe Terranova concurs, noting that mega-cap companies, particularly Apple, will likely continue their aggressive buyback strategies irrespective of valuations, strengthening shareholder value.

Individual Stock Analyses

Amazon

Jim Leventhal praises Amazon’s robust fundamentals and momentum:

"The momentum is there, the fundamentals are there. I frankly think the valuation is attractive." ([34:19])

Despite emerging labor challenges, Leventhal remains optimistic about Amazon’s growth prospects in retail, AWS monetization, and logistics. Joe Terranova supports this view, highlighting Amazon's compelling cloud story and strong market positioning.

Dell

Bryn Talkington discusses Dell's impressive performance and future growth drivers:

"Their infrastructure solutions group is where people are buying Dell. That is their networking, their servers. That's where they're getting data center growth and they had 38% growth." ([33:15])

She expects Dell's infrastructure segment to continue expanding, positioning it as a key beneficiary in the growing data center market.

Starbucks

Josh Brown shares his bullish stance on Starbucks, viewing its current price as a strong buy:

"Starbucks around 90 bucks a share. I think it's a steal. I'm adding to it." ([46:26])

Risks and Concerns

Josh Brown identifies three primary risks (or "landmines") for the upcoming year:

1. Nvidia’s Earnings Report (February 26th): A miss could significantly impact the Nasdaq and S&P 500.
2. Dollar’s Continued Strength: A rallying dollar could strain multinational earnings and introduce instability.
3. Tariff Policies: Ongoing and potential tariff adjustments could disrupt global trade relations and market sentiment.

He cautions investors against overextending into speculative trades and advocates for maintaining diversified, fundamentally sound portfolios.

Bitcoin and Cryptocurrency Outlook

The panel briefly touches on Bitcoin, with Josh Brown maintaining a balanced perspective:

"I'm invested in bitcoin since before it broke 3,000. I've never abandoned it. But I'm also not a nutcase." ([44:33])

Bryn Talkington echoes a long-term bullish stance while acknowledging short-term volatility. She dismisses the likelihood of a strategic Bitcoin reserve forming without Congressional approval, thus rendering such scenarios improbable for 2025.

Conclusion and Final Trades

As the episode wraps up, the panelists share their final stock picks:

• Josh Brown: Adds to Starbucks at around $90 per share.
• Bryn Talkington: Maintains her position on Palantir but plans to reduce holdings before earnings; continues to hold BHP despite its 25% decline.
• Jim Leventhal: Recommends sticking with Berkshire Hathaway for its stability.
• Joe Terranova: Highlights Twilio as a strong software pick.

Frank Holland emphasizes the importance of strategic, informed investing as listeners prepare for the upcoming year-end and the anticipated market shifts in January.

Key Takeaways

• Year-End Rally Potential: Limited for most; focus on strategic rebalancing in January.
• Rising Yields and Algorithmic Trading: Present significant challenges, particularly for small caps and market stability.
• January Effect: Critical period for rebalancing, potentially influencing early-year market trends.
• Software Sector: Continues to lead, driven by AI integration and high-growth companies.
• Buybacks: Record levels persist, concentrated among mega-cap stocks, bolstering shareholder value.
• Individual Stocks: Amazon, Dell, and Starbucks highlighted as strong performers with promising outlooks.
• Risks: Nvidia earnings, dollar strength, and tariff policies pose potential threats.
• Cryptocurrency: Bitcoin remains a volatile yet enduring asset for long-term holders.

Notable Quotes:

• Josh Brown ([02:29]): "Most normal people have done most of what they plan to do."
• Joe Terranova ([06:50]): "Algorithms and zero dated options are dominating the daily price action."
• Bryn Talkington ([08:09]): "The first two weeks of January are the biggest two weeks of the year for money going into the market from rebalancing."
• Bob Pisani ([38:11]): "Corporate America is also paying a 1% tax on these buybacks."
• Jim Leventhal ([10:02]): "None of that has any bearing on how I would position my portfolio going into the new year."

This comprehensive discussion provides valuable insights for investors seeking to navigate the complexities of year-end market movements and prepare for the strategic shifts anticipated in 2025. By focusing on fundamental strengths, sector trends, and cautious optimism, the panel offers a roadmap for maintaining robust investment portfolios amidst evolving market dynamics.