Bull Market Turns 2: The Resilience of U.S. Stocks Amid Fed Uncertainty
Celebrating its two-year anniversary, the bull market in U.S. stocks has demonstrated remarkable resilience, with both the Dow Jones Industrial Average and the S&P 500 reaching record highs this past week. Despite rising concerns about inflation and the Federal Reserve’s interest rate strategy, analysts believe that these factors may not disrupt the upward trend in stock prices. Rather, they view the potential for the S&P 500 to surpass its previous heights as increasingly probable.
Historic Gains in Perspective
The S&P 500 has surged more than 60% since its recent bear-market closing low on October 12, 2022. This impressive gain has prompted some Wall Street firms to aggressively revise their year-end targets upward. Analysts were caught off guard by the market’s rapid recovery, which has exceeded expectations and reshaped the landscape for investors. Notably, Goldman Sachs has already revised its S&P 500 target three times this year, highlighting the volatility of market predictions amidst shifting economic data.
Inflation Fears Emerge
While the bull market appears robust, recent inflation data has sparked debate among investors. The latest consumer price index (CPI) data, released this past week, indicated an increase of 0.2% in September, slightly above analysts’ expectations. Core CPI, excluding food and energy, rose by 0.3%, further complicating the Fed’s rate-cut strategy. Analysts expect the upcoming October inflation figures to be even more impactful due to new pressures from geopolitical concerns, including the ongoing Middle East oil crisis and domestic strikes impacting major companies like Boeing.
The Fed’s Rate Path: Not as Low as Hoped
Central to the market’s performance is the trajectory of the Federal Reserve’s interest rates. The latest futures data suggest an 87.9% chance of a 25 basis point cut in November—a decline from the previous week’s 97.4%. It seems increasingly likely that rates will not dip as low as they were at the onset of 2022, when the fed funds rate hovered between 0% to 0.25%. Market analysts are projecting a more realistic scenario where the final fed funds rate stabilizes closer to 3%, or potentially higher if inflation becomes persistently elevated.
Stock Market’s Response to Inflation
Despite these uncertainties, many analysts argue that a restrained rate-cut path may not deter stock investors. Economist José Torres noted, “If the Fed accepts higher inflation, which they kind of are, and if they stay dovish, then that’s great for stocks, because stocks are priced nominally.” This sentiment suggests that earnings per share remain the primary driver of stock valuation, potentially buoyed by inflation—as long as corporate profit margins hold steady.
Recession Fears Diminish
One of the most significant catalysts for stock market performance is the risk of recession. Analysts highlight that the Fed’s recent policy adjustments have acknowledged the importance of avoiding drastic unemployment rises, suggesting a reluctance to implement policies detrimental to economic stability. This dovish sentiment, combined with seasonal trends favoring the equity market in November and December, paints a bullish outlook, making it arduous to envision a sustained market correction over the coming months.
Thomas Urano, co-chief investment officer at Sage Advisory, reiterated this point, stating, “It doesn’t appear that the Fed wants to allow policy to be a driving force behind recession. And if you take that concern off the table, then recession fears go down.” This perspective reassures investors that the central bank will likely prioritize economic growth, further solidifying the case for a resilient stock market.
Conclusion: Staying the Course
In conclusion, the bull market’s longevity reflects a strong underlying economic sentiment amid inflationary uncertainties and cautious rate cuts from the Federal Reserve. As traditional financial principles affirm—investors should remain vigilant but also embrace potential growth opportunities. With seasonal tailwinds and inflation pressures not likely to completely derail the market, the focus now shifts to corporate earnings potential and continued Fed support. Conservative investors and market participants would do well to maintain a steady hand as the bull charges ahead.