Nothing can stop the stock market—not even the Federal Reserve. Don’t expect the rally to stop here.
If investors wanted an excuse to take money off the table this past week, they got one. On Wednesday, the Fed announced a pause in its interest-rate increases, as expected, with one very big “but”—its so-called dot plot signaled another two quarter-point hikes before it is done.
Logic would say that should have knocked the market lower. The
S&P 500 index
came into Wednesday already up 20% from its bear market low, with much of that rally driven by the hope that the Fed would hit the pause button. If nothing else, there should have been a “sell the news” reaction to go along with the actual bad news—the possibility, perhaps likelihood, of more rate increases.
There wasn’t. The S&P 500 gained 2.6% on the week, while the
Dow Jones Industrial Average
rose 1.3% and the
Nasdaq Composite
climbed 3.2%.
So why all the buying? The Fed is still close to the end of its rate hikes, which would allow economic growth and corporate profits to stabilize, and even rise for many sectors. Meanwhile, rates in the bond market could dip.
“The smoke hasn’t cleared, yet the momentum market remains,” writes Evercore ISI strategist Julian Emanuel.
That was enough for the S&P 500 to clear a number of key levels. After cracking 4200 weeks ago, it’s now well above 4300, where it peaked in August after Fed Chairman Jerome Powell interrupted a summer rally by reminding markets that rate hikes weren’t nearly finished. It ended Friday a hair under Thursday’s close of 4425, its highest level since April 2022, a sign that market participants are confident enough in the outlook to keep buying stocks.
The risk does seem low, at least for the moment. After nearly a dozen attempts at breaking 4200 since the start of the year, that number is likely to become a support level for the S&P 500, if it were to fall. And if it were to hold, the S&P 500 would likely just be gearing up to rally again.
BCA Research chief strategist Doug Peta calls 4200 “clearly quite a level. The S&P 500 could not get through that. Once it did, resistance becomes support.”
The market is never risk-free, and it certainly isn’t now. This year’s gains have been driven by a mere handful of stocks, a risk if those stocks were to falter. The S&P 500 also trades at 19 times 12-month forward earnings, while yields on government bonds are as high as 5%, making the return on stocks less attractive.
“I think that valuations by historical standards are more on the rich side relative to the macro risk and to rates,” says Keith Lerner, co-chief investment officer at
Truist.
Yet for the market to see a meaningful drop, it would clearly need a real catalyst. That could come in the form of poor economic data or earnings. Given “the lagged effects of the monetary-policy tightening, with a recession right around the corner, you will have earnings expectations primed for disappointment,” Peta says. “Then, equity performance becomes real fragile.”
Not yet, though. With the wind at the market’s back, a dip would just present a buying opportunity, especially if the market holds at key levels. “We think pullbacks are buying opportunities here,” says Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
While it usually doesn’t pay to fight the Fed, this is one of those moments when you don’t want to fight the tape.
Write to Jacob Sonenshine at [email protected]
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