The recent surge in US stocks, driven by strong corporate earnings, has propelled the S&P 500 to new highs, overshadowing concerns about the Federal Reserve’s stance on interest rates. However, as earnings season winds down, investors anticipate a potential shift in focus back to monetary policy.
Nvidia Corp’s exceptional earnings performance has underscored the robustness of the market, contributing to the S&P 500’s record-breaking streak. With the majority of companies having reported, S&P 500 earnings for the fourth quarter are poised to show a significant increase, marking the most substantial rise since early 2022.
As the euphoria surrounding earnings dissipates, attention could revert to macroeconomic indicators, particularly the steady ascent of bond yields. The recent uptick in yields, driven by diminishing expectations of aggressive Fed rate cuts, has implications for equity valuations and the cost of capital.
Angelo Kourkafas, Senior Investment Strategist at Edward Jones, highlights the potential impact of rising yields on market sentiment, especially if inflation data continues to exceed expectations, prompting the Fed to delay rate adjustments.
While futures tied to the Fed’s policy rate indicate expectations of rate cuts, upcoming inflation data, including the January personal consumption expenditures price index, will provide crucial insights into the Fed’s inflation targets and monetary policy trajectory.
Chuck Carlson, CEO at Horizon Investment Services, emphasizes the importance of inflation trends in shaping market dynamics, suggesting that a renewed downward trend in inflation could bolster interest rates and serve as a catalyst for further stock gains.
Despite concerns about monetary policy, optimism persists regarding the continued dominance of AI-driven technologies in propelling stock performance. Nvidia’s milestone achievement of reaching a $2 trillion market value reflects ongoing enthusiasm for AI innovations, positioning tech stocks for further growth.
UBS Global Wealth Management analysts echo this sentiment, emphasizing the significance of strategic exposure to the US technology sector, particularly in the context of generative AI’s potential as a decade-long growth theme.
Looking ahead, upcoming economic data, including consumer confidence and durable goods reports, will provide additional insights into the state of the economy. Investors, such as Jack Ablin, Chief Investment Officer at Cresset Capital, are hopeful for a “soft landing” scenario, where the Fed can manage inflation without disrupting economic growth, potentially benefiting stocks in the long term.
