A Very Merry Melt-Up

November gave equity investors whiplash. The first three weeks were a grind lower with all three major indices slipping more than 2.50%. The tech-heavy Nasdaq was down more than 6%, while the S&P slid almost 3.50%. Then Thanksgiving week hit and markets ripped higher with the Dow leading the charge up 2.73%. What looked like the start of the worst November since 2008 suddenly flipped into a setup for a classic holiday melt-up. 

Inside GVAAM we have been debating exactly that. I generally sit on the bullish side of the table which is likely a byproduct of entering the investment world during the AI boom. Eric Parnell, our Chief Market Strategist, tends to stay more centered and cautious, which comes from his seasoned experience and weathering of numerous business cycles. Nonetheless, over the past few weeks, our roles have reversed. I became the skeptic pushing back against his call for the S&P to reach 7000 by year end. For most of early November, it looked like my skepticism would be right as markets bled lower. Then Thanksgiving week hit and we did a complete 180. This leads me to believe he may be right, which I have quickly learned is usually the case.  

The November pullback was a natural reset for a market that had seen almost no volatility since early April. From April 8th to November 1st, equities moved singularly up and to the right, doing so with extreme concentration. The S&P 500 and Nasdaq each gained more than 30% from their April lows as investors piled into anything with an AI label attached to it. The momentum was relentless until the first three weeks of November when the combination of stretched valuations, profit taking, political noise, and fatigue in the AI trade finally broke the trend.

Technically, the market behaved exactly as you would expect in a cooling phase. Each major index slipped through its 50-day moving average in mid-November but met little resistance when pushing back above those levels in the final week of the month. The velocity of that rebound is what has me questioning the quality of this rally. A parabolic move can be perfectly fine when supported by fundamentals, but it can also be the sign of a sentiment driven chase by investors who lagged most of the year and are now scrambling to catch up.

Part of GVAAM’s job is to question regime shifts and whether they are built to last. And while this piece is titled “A Very Merry Melt-Up”, I am not fully convinced one way or the other. Before drilling into the reasons why this could be a melt-up and the reasons why it might not be, lets take a step back and identify what I mean when I use the term “melt-up.”

Defining a Melt-Up

A market melt-up is a sustained, often unexpected surge in asset prices driven more by investors rushing into the market to avoid missing out, than by genuine fundamental improvement. The gains that follow are usually unreliable signs of where markets are headed and historically have preceded sharp reversals or full-blown meltdowns. History offers plenty of examples. In early 2010, unemployment remained high and the real estate market was still deeply impaired after the financial crisis, yet stocks surged through February, March, and April. The Great Depression also saw multiple stretches where markets rose sharply despite clear underlying economic weakness.

Reasons for a Melt-Up

Below are two clear reasons why the current rally has the characteristics of a melt-up and why investors should be cautious about blindly piling into the same mega cap names that have driven returns over the last three years.

Hawkish Fed Tone

Markets are pricing a near 90% probability that the Fed cuts by another 25 basis points at next week’s meeting, yet their commentary hasn’t exactly been dovish. After the October meeting, Chair Jerome Powell struck a hawkish tone by stating that a December cut was “far from guaranteed”, and while several Fed governors have since leaned more openly toward supporting a cut, none have delivered the kind of dovish confirmation markets want.

This disconnect between expectations and messaging is exactly the kind of backdrop that produces melt-up behavior. When investors believe a cut is coming, they front-run it. They get long ahead of easing, not because fundamentals have drastically changed, but because cheaper financing might be around the corner. And when the Fed does not fully close that door as they did in late October, it fuels mechanical FOMO. 

Managers don’t want to be underweight if the market rips on a cut-driven relief rally. Even a hawkish tone leaves room for hope and that “hope gap” is precisely what momentum chases. Historically a Fed that sounds cautious but still delivers a cut creates a narrative investor’s love: policy won’t be loose long term, but short-term liquidity is coming. That combination reduces perceived tail-risk and boosts expected returns. The creation is rocket fuel for a sentiment-driven rally. In short, the market is effectively buying Santa’s ticket on the assumption of another 25 bp gift, even when the Fed’s language keeps that gift half-wrapped. 

Playing Catch-Up 

The second sign of melt-up dynamics is that investors are buying because they’re behind, not because fundamentals have materially changed. This year’s AI-driven rally has been extraordinarily narrow, and a large share of professional managers have lagged it.  

Bank of America’s November Fund Manager Survey showed merely 30% of global managers are overweight equities and most remaining underweight mega cap technology, which is the exact cohort driving index performance. Meanwhile, money market fund balances have hit a record $8 trillion, showing just how much cash remains parked on the sidelines.  

Being underweight the hyper-scalers powering the S&P is pure career risk in December. So, when markets reversed sharply into Thanksgiving, without any major shift in data, managers were forced to chase returns. That type of “buying because you must, not because you want to” is textbook melt-up behavior.  

Market breadth complicates the picture but does not contradict it. Yes, participation broadened modestly during the Thanksgiving rally, but the top ten stocks in the S&P still make up roughly 35% of the index and Microsoft, Apple, Amazon, Meta, and Tesla contributed a disproportionate share of the late-November rebound. Did we see Nvidia and Google lag their peers? Yes, but they also had astronomical runs leading up to November and Alphabet happened to be an exception to the early November bleeding with shares up more than 14% over the last month. When breadth expands from very narrow levels, it often reflects laggards getting bought simply because managers cannot afford to miss the move.  

This is not suddenly unanimous fundamental conviction. It is positioning pressure. It is investors trying not to fall further behind. 

Reasons Against a Melt-Up 

Strong Q3 Earnings 

A true melt-up requires prices to sprint far ahead of fundamentals. That isn’t what Q3 earnings show. The data points to real earnings strength rather than sentiment chasing.  What’s the headline picture? Companies beat, revenue and margins are solid, and forward estimates, although docile, have remained elevated.  

Here are the hard facts from Q3 earnings season: 

• High Beat Rates: Roughly 78%-82% of S&P 500 companies beat Q3 EPS expectations according to FactSet, which is well above long-term norms of around 67%. 

• Margins are Holding at Cycle Highs: The S&P 500’s blended net profit margin for Q3 2025 sits around 13%, the strongest in roughly a decade and meaningfully above pre-pandemic averages. 

• Forward EPS and Revenue Trends are Positive: Analysts have revised forward 12-month EPS higher for three straight months. Revenue expectations are also firming, especially in technology, industrials, and communication services. 

• Valuations Haven’t Blown Out: The forward P/E of the S&P remains in the 22x-23x range, which albeit is not cheap, but it’s not the unhinged multiple expansion you would see in a melt-up.  

None of this means risk is gone. Valuations are stretched, and leadership remains narrow, but Q3 earnings undercut the argument that this rally is purely FOMO driven. 

A Melt-Up Needs Macro Blindness 

The second reason this rally looks more sustainable than a melt-up scenario is that macro and liquidity conditions remain supportive. Melt-ups often occur when macro risk is dismissed and speculative flows dominate. That’s not necessarily the case today. Right now, macro and liquidity signals are more supportive than destabilizing. This adds a structural floor under equities. 

Real yields have eased materially. The 10-year real yield is down from its late summer highs, reducing the discount rate applied to future earnings. Lower real yields provide a mechanical boost to equity valuations and help to justify the markets move.  

Financial conditions are stable. Credit spreads are tight and while we had some chop in November, equity volatility remains largely in check. Systematic pressures like the stock-bond correlation have also normalized, meaning that risk isn’t necessarily being ignored, it’s simply not flashing danger. This keeps liquidity intact and supports risk taking. 

Finally, your traditional economic indicators may look soft but certainly not recessionary. Breakeven inflation rates remain steady around 2.3% and unemployment still sits at around 4%. Consumer spending, while pressured, continues to grow modestly. In other words: the macro picture may not be full of momentum, but it’s not deteriorating in the way that typically precedes melt-ups. 

This isn’t a clean melt-up and isn’t a clean fundamental breakout. It’s a holiday cocktail of FOMO, positioning pressure, and legitimately solid earnings. That combination can keep pushing prices higher, but it’s not a guarantee of durability. 

Investors don’t need to play Grinch, but they also shouldn’t assume Santa is delivering unlimited upside. Respect the rally, participate where fundamentals justify it, and keep your guard up. The market may feel festive, but it hasn’t earned blind trust.  

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.

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Evan Coffey Associate, Asset Management

Evan is an Associate on GVA’s Asset Management Team. He specializes in investment research and has a passion for finance and economics. Evan uses his strong work ethic and financial literacy to help manage GVA’s multi-asset portfolios, mitigate risk, and help coordinate wholesaler relationships.

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