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There doesn’t seem to be much to worry investors at this point.
The S&P 500 rose 2.3% on Friday, marking its best week of the year. That helped the benchmark index rise about 10% this year, setting a new series of highs.
Other major indexes, such as the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index, have recently been trading at or near record highs, as have a variety of individual companies, including Microsoft, JPMorgan Chase, and Walmart. has been done. Shares of social media company Reddit soared nearly 50% in its first day of trading on Thursday, a sign that investors want more technology companies to go public this year.
The ferocious influx of capital accelerated this outflow. Investors poured nearly $60 billion into funds buying U.S. stocks in the week ending March 13. This is a data record from EPFR Global, which has been tracking capital flows for over 2018. 20 years. There were then some outflows in the week ending Wednesday (weekly inflows could spike), but not enough to disrupt momentum.
The gains continued this week despite the Federal Reserve’s Wednesday forecast that inflation this year will remain slightly higher than expected several months ago. As a result, central bank officials now expect interest rates to fall more slowly in 2025 than previously expected, and have just barely maintained their outlook for a three-quarter point cut this year.
Expectations for lower interest rates are part of the rationale for the rise in stock prices this year, just as the stock market fell in 2022 due to a rapid rise in interest rates.
But prospects for cuts have gradually faded, rocked by stubborn inflation in the first two months of this year. Investors in the futures market had expected the Fed to cut rates up to six times this year, but recently the Fed has changed its view to the extent that only three cuts are likely. There is. That doesn’t seem to matter with the stock market’s ferocious rally.
For some investors, this bullish stance is a sign that the Fed is loosening its grip on the fate of financial markets, with managers instead hoping that the economy is doing well even if interest rates remain elevated. We are paying attention to confirmation that the company can maintain its strong performance.
“It’s a nice transition from the need for the Fed to cut rates to a situation where the economy supports itself, supports valuations, supports earnings,” said Alan McKnight, chief investment officer at Regions Bank. “We are moving from a Fed-led rally to an economy- and earnings-driven rally.”
For some purists, this will always be the case. If inflation had cooled more quickly, it would likely have signaled an even sharper economic slowdown, prompting a series of interest rate cuts to prop up the economy. While the economy is still performing well, with inflation meeting some resistance on its way back to the Fed’s 2% target, it has also contributed to strong earnings for the country’s publicly traded companies. Essentially, purists argue that rather than investors’ optimism remaining dependent on Fed policy, the Fed has adapted its stance to better news for markets.
More importantly, investors’ main concerns at the beginning of the year – that inflation could continue faster than the Fed intended, or even accelerate again amid a weak economy – have yet to materialize. That’s what I haven’t done.
“Even if inflation is a little stronger because the economy is doing well, that’s still largely good for stocks,” said Seema Shah, chief global strategist at Principal Asset Management. “As long as we’re not talking about a return to inflation, this is pretty good news.”
Binky Chadha, an equity analyst at Deutsche Bank, said that while many were still predicting economic turmoil and had been predicting a rise in stock prices last year, investors’ concerns about where interest rates would end at the end of the year are changing. Expectations are now in line with the levels suggested by futures markets in September, he said. The S&P 500 has soared during this time, demonstrating the stock market’s long-term resilience to interest rates.
For Chadha, that means the stock market is “decoupling” from the Fed because of the strength of the economy.
CEOs of American companies are also feeling more optimistic, according to a recent survey from the Conference Board. Companies are increasing the amount of their share buybacks, a tactic seen as driving stock prices higher. Another sign of confidence was that Facebook’s parent company, Meta, announced it would start issuing dividends for the first time in February.
Earnings forecasts for the first quarter of this year, when companies begin reporting in the coming weeks, have declined but remain strong, with large companies on track for year-over-year profit growth for the third consecutive quarter.
Some analysts worry that the rosy outlook underpinning the rally could continue to disappoint. Despite the growing confidence among chief executives, companies are leading analysts to expect future earnings growth to be even weaker. (Admittedly, sometimes it’s a gamble to set expectations low enough to ensure outperformance.) And as consumer finances, the fuel that powers the economy, tighten There are some signs. Additionally, with the presidential election looming, companies may hold back on hiring until there is less uncertainty about the outcome.
“It could get worse from here,” warned George Gonsalves, chief macro strategist at MUFG Securities.
That’s something even market watchers like Chadha expect will eventually pull back, but not while economists and the Fed are revising their forecasts to account for the strength of the economy.
“Right now, the rally is going on,” he said.
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