The S&P 500 continues to rally. However, geopolitical tensions and the US elections might halt its growth.
Last Friday, the S&P 500 reached an all-time high, with investors pricing in the end of monetary tightening. A soft landing in the United States appears likely as economic indicators continue to showcase strong resilience in the market.
Today, the S&P 500 will open at 4,839.81 points, meaning it broke the previous record reached in November 2021. Markets will pick it up from there on Monday, trying to solidify this new level and bring it as far as possible.
After the S&P 500 reached a similar level in November 2021, it began a steep bearish period throughout 2022. This decline was mostly driven by external factors, including inflation, monetary tightening, and the war in Ukraine.
Investors will face a completely different scenario on Monday, or at least that’s what they hope. Monetary tightening and inflation are behind us, with the Federal Reserve signaling several cuts in 2024.
Inflation remains at a steady 3% level. Markets are confident it will decline in the first half of the year, reaching the 2% target by 2025.
Investors are pricing in the first cut in March 2024. This might be earlier than what’s realistically possible for the Fed. However, investors and the Federal Reserve both agree cuts will start this year.
At the same time, the economy resisted high interest rates and remained stable. The American GDP growth outpaced China’s in the third quarter of 2023, and December unemployment data was better than expected.
What could go wrong?
If the economy is stable and the worst of the monetary tightening is behind us, what could go wrong for the S&P 500? Is another 2022 possible?
2024 is an election year in the United States. The economy is one of the most important indicators for American electors and may swing the vote in one direction or another.
With Donald Trump dominating the Iowa caucus, many analysts believe his victory is possible. Trump would launch an isolationist campaign, worsening the already delicate global geopolitical situation.
The withdrawal of the United States from the global political scenario would wreck the S&P 500 growth (as well as ushering in a new global order).
While this is the most extreme scenario, the are many other geopolitical crises that, like the war in Ukraine, could hamper US stock growth. The Ukraine war itself is not over, and Russia might gain the upper hand. The Israel-Hamas conflict risks expanding in the whole region at every moment, with Iran, Hezbollah, and the Houthi Rebels ready to fight.
The markets might be looking at 2024 too optimistically. Let’s hope they are right.
