Major U.S. equities are on the brink of a defining moment as the Federal Reserve gears up to execute what could be the concluding rate hike in one of the most assertive monetary policy constricting cycles witnessed in years.
The ongoing year initially signaled potential doom for investors who anticipated that soaring interest rates would trigger a recession, further weakening the stock market following the steep decline in 2022.
Defying such anticipations, the U.S. economy is showing admirable resilience, even as the Fed manages to get a grip on the inflation. This ‘just right’ economic scenario has boosted the stock market, with the S&P 500 index displaying a near 19% increase since the beginning of the year.
Rate hike – The turning point for U.S. equities
Investors are keenly eyeing the upcoming meeting of the Federal Reserve scheduled for July 26th, with the general consensus predicting a 25 basis point rate hike.
Many are hopeful that the Federal Reserve policymakers will signal growing confidence in inflation cooling down, effectively negating the need for additional hikes and lending support to the economic thesis that has been buoying stocks recently.
Cliff Corso, Chief Investment Officer at Advisors Asset Management, encapsulated the market sentiment: “Inflation continues to play a pivotal role in driving the macro market, making the Fed’s upcoming decision crucial for the market direction.”
Buoyed by expectations of a favorable macroeconomic landscape and the potential end of Fed tightening, some analysts are revising their forecasts for this year’s stock market performance.
Credit Suisse’s Jonathan Golub recently upped his year-end projection for the S&P 500 from 4,050 to 4,700, based on a robust economic outlook and strong anticipated earnings in the technology and communication service sectors.
Furthermore, the National Association of Active Investment Managers’ data revealed that stock pickers’ exposure to equities is currently at its highest level since November 2021, marking an impressive turnaround since the Federal Reserve began its rate-hiking journey.
A glowing forecast amid recession concerns
While recession predictions were considered inevitable at the year’s start, the estimates are now increasingly less threatening. Goldman Sachs notably reduced its likelihood for a U.S. recession commencing within the next 12 months to 20%, down from an earlier 25% forecast.
This change came alongside the bank’s increase in its year-end target for the S&P 500 to 4,500, up from 4,000, on the grounds of easing inflation.
However, not all market strategists share the same optimistic view, with concerns lingering around potential earnings shortfalls during the ongoing earnings season and the durability of inflation.
Sunitha Thomas of Northern Trust voices concerns over stubborn inflation and has reduced equity exposure in recent months.
Rising valuations have emerged as another source of concern, with the S&P 500 currently trading at 20.8 times forward earnings, up from around 16 times at the start of the year.
Despite these high valuations, Christopher Tsai of Tsai Capital remains unbothered, believing that the market still offers overlooked opportunities, such as index provider MSCI Inc and animal health company Zoetis Inc.
