S&P 500 Hits 20-Month High Amid Economic Optimism

Key Takeaway

• S&P 500 hits a 20-month high, marking its sixth consecutive winning week, fueled by strong U.S. job market reports and energy stock gains.
• Concerns over potential inflationary pressures from the job market report raise questions about the Federal Reserve's interest rate decisions.
• Market expectations lean towards the Fed keeping interest rates steady, with consumer sentiment improving as inflation expectations drop to 3.1%.

Market Resilience Amid Economic Optimism

Wall Street reached a 20-month high, with the S&P 500 climbing 0.4% and marking its sixth consecutive winning week, the longest streak in four years. This surge brought the index within 4% of its record set at the beginning of last year. The Dow Jones Industrial Average and the Nasdaq composite also saw gains of 0.4%. This rally was fueled by a stronger-than-expected U.S. job market report, indicating robust economic health. Energy stocks led the gains, rising 1.1% as oil prices increased, reflecting hopes for heightened fuel demand. Carrier Global notably surged 4.5% after announcing the sale of its Global Access Solutions business to Honeywell for $4.95 billion.

Interest Rates and Inflation Concerns

The positive job market report, however, raised concerns about potential inflationary pressures, which could influence the Federal Reserve's interest rate decisions. The bond market saw a sharp increase in yields, with the 10-year Treasury yield rising to 4.22% from 4.15%. High interest rates and yields generally exert downward pressure on investments, including stocks. Big Tech stocks had mixed performances, with Alphabet experiencing a 1.4% decline, while Nvidia, Apple, and Microsoft posted gains.

Economic Indicators and Federal Reserve's Next Moves

The U.S. job market report is among the last significant pieces of data before the Federal Reserve's next interest rate announcement. Another key update will be the U.S. consumer inflation report due Tuesday. Market expectations lean towards the Fed maintaining its main interest rate steady in its upcoming meeting. However, traders have adjusted their bets on the timing and extent of future rate cuts, with less than a 46% chance of a cut by March, down from nearly 65% a day earlier.

Consumer Sentiment and Oil Market Trends

A preliminary report showed a drop in U.S. consumers' inflation expectations for the coming year to 3.1% from 4.5%, the lowest since March 2021. This improvement in consumer sentiment, mainly due to better inflation expectations, has helped erase declines from the previous four months. In the oil market, benchmark U.S. crude oil prices rose, recovering some of their recent losses, though they remain significantly below their September levels.

Street Views

• Andrew Slimmon, Morgan Stanley Investment Management (Bullish on the market):

  "A good economy is good for earnings, full stop. If the Fed was about to cut [rates], I would have to worry about an economic slowdown that jeopardizes the likelihood of the earnings growth we expect."

• Barry Bannister, Stifel (Bullish on more-cyclical and value-oriented stocks):

  "A solid economy and sticky inflation will mean that some of the high [price/earnings multiple] megacap growth stocks top out and the market broadens out."

• Evan Brown, UBS Asset Management (Neutral on interest rates impact):

  "The balance of risks is skewed toward higher yields... But what we’re seeing is an economy that’s in good shape and can withstand higher yields, even if a jump in yields can be a short-term headwind for equity [valuation] multiples."

• Edward Yardeni, Yardeni Research (Neutral/Bullish on no need for rate cuts):

  "If the Fed is really as data dependent as it says, there is no good reason for a rate cut at all... Even productivity growth has made a comeback, which suggests the economy can continue to grow with a higher fed-funds rate."

• Savita Subramanian, BofA Securities (Bullish on S&P 500 valuation justification):

  "Forty years ago, around 70% of the benchmark was in asset-intensive sectors like manufacturing, financials, and real estate. Today, 50% [of the index] is in asset-light innovation-oriented stocks mostly in tech and healthcare. It’s a reason to reconsider overall valuation."