US equities are overbought, or close to it. But that doesn’t mean much in isolation.

We’re now officially in the “Santa rally” window. It’s a seven-session period that includes the final five sessions of the year and the first two sessions of the new calendar. That, as opposed to the unofficial Santa Rally window, which opens in November-ish (or whenever you want it to open to fit your narrative).

Regardless of what happens this week and early next, there was a Santa rally in 2023. The S&P was up 16% from the lows in late-October through Christmas. If that’s not a Santa rally, then I don’t know what is.

New records are a foregone conclusion. This time last year (and well into 2023 besides), some notable bears were adamant that a retest of the October 2022 lows was likely. I’ll eschew the temptation to engage in gratuitous derision. It’s hard to make predictions, after all. Especially about the future.

The excuse for any gains that play out this week (well, besides Santa seasonality) will be that soft landing odds increased meaningfully with the last round of top-tier macro data from the US.

“[It’s] risk-on with US markets back to betting on faster and earlier rate cuts,” BNY Mellon said Tuesday, citing last week’s PCE prices update. Recall that when measured on a six-month annualized basis, core price growth on the Fed’s preferred measure is now below target, at 1.9%.

It’s worth noting that Tuesday’s two-year sale stopped through in what it was probably fair to call a surprisingly solid result. Treasurys were mostly unchanged. If you’re searching for conviction in the price action, you’ll be frustrated this week.

For what it’s worth (and some readers are already apprised of this), JPMorgan has the most bearish outlook for US equities headed into the new year. I used the visual below in a short update last week, but it wasn’t widely accessible and besides, even those who could access it might’ve missed it given the proximity to the long weekend.

As the figure shows, JPMorgan’s view (Dubravko Lakos Bujas) is considerably more bearish than that of Morgan Stanley’s Mike Wilson. Lakos Bujas’s target implies double-digit downside for equities next year.

“It has become consensus that a recession will be avoided, while equity multiples appear rich, credit spreads are tight, and volatility is unusually low,” analysts led by Marko Kolanovic wrote, in their final weekly research digest of 2023. “Even in an optimistic scenario, we believe upside is limited for risky assets, favoring cash and bonds over equities from a risk-reward standpoint.”

Headed into the new year, the bank is maintaining their defensive allocation, with an underweight in equities and credit versus an overweight in cash and commodities.

Meanwhile JPMorgan’s economics team said the Fed pivot, lower commodity prices and the recent easing in financial conditions together “shook the scenario probability tree.” Soft landing odds are higher now, they conceded.

“We have reduced the probability along the branches in which a recession takes hold early next year (‘Damage done’) or DM central banks return to tightening (‘Too darn hot’),” the bank said. “The upshot of this shift is that the ‘Boil the frog’ and ‘Soft landing’ scenarios are now gauged as having roughly an equal probability of materializing.”