S&P 500 frustratingly close to 5,000
US stock indices rallied again yesterday. Tech led the gains with the NASDAQ 100 up just under 1%. The S&P 500 ended up 0.8% and is on the cusp of breaching the 5,000 level. But the broader market was unable to join in the fun as the Russell 2000, the US’s ‘small cap’ index of domestically-focused companies, ended the day a fraction lower. Investors are taking a pragmatic view of the Federal Reserve’s insistence that it is not yet ready to reduce interest rates. There’s now just a 20% chance of a 25 basis-point rate cut at the Fed’s next monetary policy meeting in March. This is down from 77% just three weeks ago. The CME’s FedWatch Tool also suggests that expectations for rate cuts over 2024 have also been tempered to some extent. But with cuts of 100-125 basis points now expected (down from 150), the markets are still far more dovish in their outlook than FOMC members. The latter are forecasting a total of three 25 basis point cuts this year. Nevertheless, it is becoming apparent that the US economy can function perfectly well with rates at an upper bound of 5.50%, and an expectation that this is the top. Economic growth is perfectly decent, especially when one bears in mind that many were predicting a recession this time last year. Unemployment is still near historical lows, and while not yet at target, inflation is trending in the right direction. The earnings season is also proving supportive for equity prices. According to FactSet, at the end of last week, of the 46% of S&P 500 constituents that have reported so far, 72% have provided positive surprises on earnings, and 65% on revenues. Chip designer Arm was up 64% today on a strong earnings report and positive guidance. Disney rallied 10% as it also surprised to the upside. Today’s biggest releases include ConocoPhillips, Philip Morris, Under Armour, Ralph Lauren, Duke Energy and Pinterest.
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