As we head into the final stretch of the year, the market is giving investors an early holiday gift: a genuine Santa Claus rally, and this time it’s wrapped in something even better for long term health: broadening rotation.

Yesterday’s rally continued a pattern we’ve been watching unfold over the past several weeks. Market participation is widening meaningfully, with the S&P 500, Nasdaq 100, and especially the Russell 2000 showing strong breadth. Small caps are once again leading the charge, with Russell 2000 breadth near 74% and returns extending more than 200 bps over large caps following last week’s FOMC announcement.

Technically, the picture looks even brighter. The Russell 2000 has broken decisively above a three year downtrend and has posted new year-to-date highs. Quarter-to-date, it has outperformed large caps by roughly 400 bps and has notched three straight intraday records. That kind of relative strength tends to be durable, especially when supported by improving fundamentals.

And those fundamentals are shifting. Small cap companies typically benefit most from easing rate expectations, given their floating rate debt and more immediate sensitivity to refinancing costs. Earnings expectations are also accelerating, with Russell 2000 profits projected to grow around 35% annually over the next two years, more than twice the S&P 500’s expected growth. Add in valuations near 15x forward earnings (vs. 22x for the S&P 500), and the setup remains compelling.

In short, the rotation before Christmas is a welcome development. Broader participation, supportive technicals, and improving fundamentals are giving this Santa Claus rally more staying power than usual as we head into year-end.

I've also included a piece from our CIBC Economics team entitled "Doubling up".

As always, if you have any questions, please feel free to give us a call at any time.

Have a great weekend.

Milan