The S&P 500 is growing despite the Fed keeping interest rates unchanged. What is still pushing the price of the index higher? Does it make sense to expect further increases?
Last week, the S&P 500 and Nasdaq continued to hit new records, even as the Federal Reserve further pushed back expectations for interest rate cuts by choosing not to change monetary policy.
What justifies the strength expressed by US markets in this situation of economic, monetary, and even political uncertainty? Does it make sense to expect a collapse at this time? Or are we just at the beginning of the race for the US market?
What is happening in the stock market?
The bond market continues to mathematically follow the expectations created by Powell in the various conferences, with a two-year yield of around 4.7%. So, essentially, the market has not yet started to discount the prices of fixed-income securities the possibility that the Fed will start a process of lowering rates. Inflows into funds that aim to provide investors with exposure to the government bond market have been steadily growing, a growth that parallels what is currently occurring in funds linked to the US stock market.
This positivity is reflected in the prices of assets in the market: in 2024, the S&P 500 has gained almost 15%, while the Nasdaq has grown by more than 20%. This occurred at the same time as a substantial appreciation in gold futures, almost indicating an increased risk of recession. However, the much-discussed US recession did not happen. It seems to have fallen off analysts’ radars and although the yield curve remains inverted, the economy continues to grow at a positive pace.
Many experts attribute this situation to the large influx of capital over the last 10 years, which is now pouring into the capital market, moving towards securities with positive margins or assets with limited supply, such as gold, and why not, also Bitcoin .
The tech segment’s push may not be over yet
The marked and persistent enthusiasm for artificial intelligence has had a positive impact on the share prices of technological companies, even partially, triggering the rise we have witnessed in the markets in recent years.
The growth was the result of a robust economic context, together with the adoption of artificial intelligence by many large-cap technology companies, which increased corporate profits and multiples of many companies, generating optimism among investors. And this is why technology stocks have been the main players in this bull market, while other sectors are not performing as well, indicating poor market breadth.
Julian Emanuel himself, a well-known market strategist with a long career in the financial sector, recently appeared bullish on the future performance of the S&P 500. Currently a strategist at Evercore ISI, Emanuel raised his year-end target to the S&P 500 from 4,750 to 6,000 points. According to the expert, the earnings per share of the S&P 500 will increase 8% in 2024 and 5% in 2025. Therefore, the market is not betting on these increases without a logical basis, but by following a thoughtful view of the great earnings growth that technology stocks are experiencing thanks to the introduction of artificial intelligence solutions.
Will the Fed rate cut ever come?
This week, other Fed members will give speeches that could further clarify their position, and it is important to note that many agree that the Fed could cut rates at least once in 2024.
For example, Minneapolis Fed President Neel Kashkari said it is reasonable to expect a rate cut no sooner than December, contrary to initial hopes for cuts as early as March.
Kashkari reiterated that the Fed wants to see more evidence that inflation is on track to return to 2% before making rate decisions. He added that once inflation cools, mortgage rates may fall. However, cutting rates now could increase home prices without improving affordability.
In addition, it will be important to evaluate the words of Philadelphia Fed President Patrick Harker, who will speak about the future economic outlook for the United States, and Richmond Fed President Thomas Barker, who will appear in a webcast to discuss the same topic.
Soft Landing: what to expect from the market?
With the intensification of a soft landing scenario and a possible cycle of declines in interest rates, it would create a particularly favorable situation for the stock market. This is not only because lower interest rates make it cheaper for businesses and consumers to borrow money, but also because bonds would become less attractive in the eyes of the market. It is important to remember that liquid funds are currently at their highest levels of capital raising, indicating a huge pool of liquidity that could enter the stock market.
In this context, American small caps become particularly interesting: these companies could benefit from lower financing costs, improving their profit margins and incentivizing further investments in expansion and development.
This, combined with the fact that the COVID pandemic has led to record government stimulus and that consumers remain financially stable thanks to high cash balances and low leverage, may justify the US market’s outperformance over this period.
Original article published on Money.it Italy 2024-06-17 17:52:39. Original title: E se la salita dell’S&P 500 fosse appena iniziata?
