© Reuters. Fasten your seat belts!US stocks will usher in an inflection point next week, and a large part of the market is still driven by macro
FX168 Financial News (North America) News The U.S. stock market rally faces a potential inflection point next week, with the Federal Reserve expected to deliver the final rate hike in its most aggressive monetary policy tightening cycle in decades.
At the start of the year, many investors expected rising interest rates to trigger a recession, further hurting stocks after a steep decline in 2022. Instead, the U.S. economy has shown resilience despite the Fed’s progress in fighting inflation — an ideal “Goldilocks scenario” that many believe will support stocks. The S&P 500 has risen nearly 19% so far this year, closing at 4,534.87 on Thursday (July 20), only about 6% below its all-time high set in January 2022.
While investors widely expect the central bank to raise interest rates by 25 basis points at its July 26 meeting, many are also hoping for signs that policymakers are more confident that inflation will continue to cool, eliminating the need for the Fed to raise borrowing costs sharply further and supporting growth.
Cliff Corso, chief investment officer at Advisors Asset Management, said: “A large part of the market is still macro-driven, and inflation is still the dominant factor. The Fed’s words and deeds next week will be critical.”
Expectations of a benign macroeconomic backdrop and an end to Fed tightening have prompted some analysts to revise their views on how high stocks could go this year.
Credit Suisse’s Jonathan Golub on Tuesday raised his year-end target for the S&P 500 to 4,700 from 4,050, citing a stronger economic outlook and expectations for strong earnings in technology and communications services.
Fundstrat Global Advisors’ Tom Lee raised his year-end target to 4,825 earlier this month, while Yardeni Research’s Ed Yardeni sees the S&P 500 rising to 5,400 over the next 18 months.
Meanwhile, a measure tracked by the Association of Active Investment Managers showed investors’ exposure to equities reached the highest level since November 2021, months before the Federal Reserve began its rate-hiking cycle.
“Bearish investors have had to capitulate,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “We’re seeing a fundamental backdrop of lower inflation, resilient economic data, stronger consumer confidence and a weaker dollar, which is a good recipe for gains.”
Eric Freedman, chief investment officer at U.S. Bank Wealth Management, has increased his holdings in recent months and has become increasingly bullish on the technology sector, as he expects corporate earnings to improve as the economy remains resilient.
“The tight job market and real wage growth did help consumers, while we also saw some real progress on inflation,” he said.
At the same time, predictions of a recession – seen at the beginning of the year as a near certainty – have become less dire.
Goldman Sachs on Monday cut the chance of a U.S. recession starting in the next 12 months to 20% from its previous forecast of 25%, arguing that easing inflation could open the way for the Federal Reserve to cut interest rates without triggering a recession. The bank last month raised its year-end target for the S&P 500 to 4,500 from 4,000.
However, many strategists remain pessimistic, wary of the current earnings season’s cash crunch and surprises from persistent inflation.
Sunitha Thomas, senior portfolio manager at Northern Trust, believes inflation will be more persistent than expected and has reduced equity exposure in recent months.
“We’ve been telling clients that the market is working really well for some really good reasons, but now is a good time to rebalance,” she said.
Rising valuations are another concern, with the S&P 500 now trading at 20.8 times forward earnings, compared with around 16 at the start of the year.
2023-07-21 20:16:45
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