As U.S. inflation continues to cool, stocks are riding a wave of optimism.<\/p>\n
During the past week, the S&P 500 Some bulls expect an improved economic outlook to send the S&P 500 to an all-time high later this year. The large-cap equities gauge hit a record close of 4,796.56 in January, 2022, according to Dow Jones market data.\u00a0<\/p>\n In that camp stands Scott Ladner, chief investment officer at Horizon Investments. \u201cThis is increasingly looking like an economy that just can\u2019t get knocked off its footing,\u201d said Ladner in a phone interview.\u00a0<\/p>\n \u201cWe see the nominal GDP coming in the 5% <\/strong>to 7% range this year. And earnings are priced at 0% right now. So we think there\u2019s some room for earnings to catch up,\u201d Ladner said.\u00a0<\/p>\n Meanwhile, the Federal Reserve may be be close to the end of its year-long campaign to raise interest rates to slow the economy and lower inflation and steady or lower borrowing costs add more fuel to the rally, noted Ladner.\u00a0<\/p>\n The market consensus is that the Fed will raise its interest rate at least one more time before the year concludes.\u00a0Future funds traders are pricing in an over 95% chance the U.S. central bank will raise its bench mark interest rate in July by 25 basis points to the range of 5.25% to 5.5% and a 23% likelihood that it will deliver one more hike after July, according to CME Fed Watch. <\/p>\n \u201cWe might have already seen the peak of interest rates. That\u2019s actually some fuel for multiples to be able to expand,\u201d said Ladner.\u00a0<\/p>\n Greg Bassuk, chief executive at AXS Investments, echoed the point. \u201cWhile we do anticipate at least one more rate hike, we think the ending of a two-year track of rate hikes is going to put more certainty into the market and very importantly, have the U.S. economy achieve a soft landing and avoid a recession.\u201d<\/p>\n Adding to the tailwind for risky assets is a weakening U.S. dollar. The ICE U.S. Dollar Index If the Fed is close to being done with increasing its benchmark interest rate, while other central banks are not, it would weigh on the greenback even further, noted Ladner.\u00a0<\/p>\n Still, there are several challenges that may impede stocks from extending their rally.<\/p>\n Raymond Bridges, portfolio manager of the Bridges Capital Tactical ETF Read:<\/strong> The U.S. stock-market rally seems unstoppable, so why does bearishness still persist<\/p>\n The Fed\u2019s balance sheet has been shrinking for the past few months, after the central bank again expanded it in March by setting up a new emergency loan program and lending more than $300 billion to provide liquidity when some regional banks failed during the first quarter of the year. \u00a0<\/p>\n \u201cThose bank term funding programs added a lot of liquidity into the marketplace to stave off a recession, or a credit crunch,\u201d Bridges said. \u201cIt was a nice lifeline [for banks], but I think that\u2019s what extended this bear market rally that we\u2019ve had.\u201d<\/p>\n As the Fed\u2019s balance sheet declines to levels seen before March, some banks will have to pay back the emergency loans to the Fed which have a tenor of up to a year, \u201cthat\u2019s actually a net liquidity draw,\u201d according to Bridges.<\/p>\n \u201cI see all of that occurring as well as another rate increase. We\u2019re gonna need something to change policy-wise and some blow-out earnings to get a continuation in the [upward] trend in stocks,\u201d Bridges said.\u00a0<\/p>\n What\u2019s more, if the Fed ends up delivering more interest rate hikes after July, it could significantly undermine the U.S. economy. The Fed\u2019s dot-plot forecast in June showed that officials expected two more rate hikes by the end of the year.<\/p>\n Also read:<\/strong> Fed\u2019s Waller, unimpressed by inflation data, calls for two more rate hikes this year<\/p>\n Philip Colmar, managing partner and global strategist at MRB Partners, said while he doesn\u2019t think the credit conditions are tight enough for a recession to hit this year, if the Fed \u201cis forced to do more than another 25 basis point hike before it pauses or if yields were to move meaningfully higher, then maybe we\u2019re getting that catalyst [for a recession] in place.\u201d\u00a0<\/p>\n Check out:<\/strong> Why markets are misjudging the Fed\u2019s ability to raise rates even though inflation is slowing<\/p>\n Analysts at Capital Economics are even more bearish, saying the U.S. economy is already heading into a mild recession. <\/p>\n \u201cWhile we do think AI is a transformative technology that will give rise to a much stronger stock market in 2024 and 2025 as investors seek to crystallise its benefits upfront, we are sticking to our forecast that the S&P 500 will drop back a bit in H2 2023 as the US economy flags in the meantime,\u201d John Higgins, Capital Economics\u2019 chief markets economist, wrote in a recent note.\u00a0<\/p>\n What\u2019s more, while many analysts expect inflation to continue head downward, there might be bumps in the road, with prices rising more than expected for certain months, noted AXS\u2019s Bassuk. <\/p>\n \u201cA lot of factors contribute to the CPI, the PPI. And all it takes is a slight change in any one of these months,\u201d Bassuk said.\u00a0<\/p>\n
\n SPX,
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\n climbed above 4,500 for the first time in more than 15 months, after both the consumer price index and producer price index data showed cooler-than-expected inflation in June.\u00a0<\/p>\n
\n DXY,
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\n fell to 99.96 as of 4 pm Eastern on Friday, the lowest close since April 2022, according to Dow Jones market data. <\/p>\nDangers lurking <\/h2>\n
\n BDGS,
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\n said he expects U.S. stocks to end the year lower, citing further tightening of credit conditions.\u00a0<\/p>\n