These Are the 3 Hottest Stocks in the S&P 500 Heading Into the New Year. Should You Invest in Them?

Albemarle shares have rallied ~39% over the past month after beating Q3 revenue and earnings on Nov. 5 and benefiting from rising demand for lithium in battery storage, retail electricity and solar markets despite sluggish EV sales. Solventum, a 3M spinoff (Apr 2024), is up ~25% after Q3 results topped forecasts, management raised full-year earnings guidance and the company announced a $1 billion share repurchase program. Merck is up ~22% after its Oct. 3 quarter exceeded estimates, Keytruda sales rose 10% year-over-year to over $8 billion, and cost cuts led management to raise its 2025 earnings outlook.

Analysis

Market structure: Albemarle (ALB) and other downstream lithium chemical suppliers are the near-term winners as rising non-EV battery demand (utility-scale storage, retail electricity, solar-plus-storage) tightens the midstream conversion market; expect incremental pricing power for refined lithium products over the next 6–18 months if spot carbonate/hydroxide prices remain >10–20% above long-run marginal cost. Solventum (SOLV) benefits from tactical buybacks and upbeat guidance but remains exposed to execution risk in medical devices; Merck (MRK) gets durable cashflow uplift from Keytruda plus cost cuts, improving free cash flow and lowering leverage risk. Direct losers: high-cost miners/juniors without conversion capacity and OEMs relying on immediate EV volume growth to justify capex.

Risk assessment: Tail risks include a fast re-acceleration of lithium project supply (Chile/Argentina ramp in 12–24 months) or a shift to LFP chemistry reducing refined lithium demand — both could compress ALB margins by 20–40% from peak. Regulatory/clinical risks for SOLV (recalls, FDA reviews) and patent/competitive pressure on Keytruda are medium-probability tail events; expect volatility spikes around quarterly reports (next 30–90 days) and major Chinese policy announcements. Hidden dependency: ALB’s margin realization is constrained by conversion capacity and contract mix (spot vs long-term offtakes).

Trade implications: Tactical: establish measured long exposure to ALB (2–3% portfolio) and MRK (2–4% core) with defined stops; use 6–12 month call spreads to capture upside while limiting cash outlay (buy 12-month ALB 20–30% OTM call spread, MRK 9–12 month diagonal). For SOLV, prefer short-duration longs (1–3%) funded by selling short-dated (30–60 day) OTM calls against existing positions to monetize buyback optimism. Pair trade: long ALB / short high-cost lithium juniors or spot-exposed ETFs to isolate refined-chemicals beta vs raw spodumene price risk.

Contrarian angles: The market may be overstating sustained EV-driven lithium demand — storage and solar segments can be seasonal and sensitive to subsidy cycles; thus ALB’s rally could be partly momentum-driven and vulnerable if spot prices fall 15%+. Solventum’s pop may be buyback and guidance-driven rather than structural market-share gains; if capital returns are front-loaded and organic growth stalls, multiples could mean-revert. Historical parallel: 2017–19 lithium boom-bust shows fast-capex response and rapid margin erosion; plan for a similar 12–24 month reversion scenario and size positions accordingly.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in ALB using a 9–12 month call spread (buy 12-month 20% OTM calls, sell 30–40% OTM calls) targeting ~30% upside over 12 months; set a hard stop if ALB falls 15% from entry or if lithium spot prices drop >20% within 90 days.
• Initiate a 2–4% core long in MRK for 12 months to capture Keytruda tailwinds and cost cuts; hedge tail risk by buying a 6–9 month 10% OTM put if MRK rises >15% in two weeks to lock in gains.
• Allocate 1–2% to SOLV as a momentum trade funded by selling 30–60 day 10–15% OTM calls; exit or re-evaluate if Solventum does not repurchase at least 50% of announced $1B within 6 months or misses next quarterly EPS guidance.