The stock market has experienced an astonishing rally, defying all expectations and leaving skeptics anxiously waiting for a potential drop. After a sharp decline in early October, the S&P 500 has soared by approximately 25%. While a moderate rebound would have been anticipated, the magnitude of this rally has caught many by surprise.
Driving these impressive gains is the hope that the Federal Reserve will soon put an end to its series of interest rate hikes, given the ongoing downward trend in inflation. The general assumption is that stabilizing interest rates will have a positive effect on the overall economy and corporate profits. However, it is crucial to consider the short-term risks associated with higher interest rates. These risks may result in delayed consequences for earnings.
Adding to concerns is the fact that the market is now considered expensive, with the S&P 500 trading at just over 19 times forward earnings per share estimates. This is a significant increase from the approximately 15 times it stood at when the rally began. When compared to the current high interest rate environment, this multiple is historically high.
In summary, while the stock market’s unexpected rally has generated optimism, caution remains necessary. The eventual impact of rising interest rates on corporate earnings could introduce volatility to the market. As investors continue to navigate these uncertain waters, keeping a watchful eye on key economic indicators will be crucial for making informed decisions.
The Market’s Resilience Amidst Headwinds
The market has been defying expectations, rising above various challenges that could have pulled it back. One such hurdle was the sudden increase in Treasury yields during the first week of July. Typically, this would put significant pressure on the market. Additionally, the federal-funds futures market still anticipates the Federal Reserve raising interest rates once or twice more before its final decision. Another potential obstacle in the future could be lackluster corporate outlooks during the second-quarter earnings season.
Nevertheless, stocks have continued their upward trajectory, demonstrating resilience and overlooking these headwinds. Investors are primarily focused on the eventual decrease in interest rates and the subsequent profit boost it will bring.
As a result, those who hold a bearish view on the market may soon have to reconsider their stance. They will need to “capitulate” and abandon their pessimistic outlook in favor of buying stocks. According to Evercore strategists, this tipping point is anticipated to occur around the 4560 level for the S&P 500 index. Currently, the index sits just above 4500. Reaching the 4560 level would signify a remarkable increase of over 27% from the low recorded in October.
Market Stability and the Potential Return of Bulls
The recent surge in the S&P 500 has ignited hopes of a repeat performance from the past. Similar to the financial crisis, where the index saw a remarkable 27% increase before plummeting back to its initial low in response to the impending recession, the current situation seems poised for a similar outcome. However, if the market manages to maintain its position around the 4560 mark without any significant cracks appearing, it would signify a decisive shift away from recession concerns, even if a mild one is still looming on the horizon.
This pivotal moment may prompt the skeptics, the bears, to reevaluate their stance. Unable to outsmart the market, they might opt to join its upward trajectory instead.