The S&P 500 has surged 12% since June 16 amid hopes that the Fed’s interest-rate hikes will end soon.
The S&P 500 has surged 12% since June 16 amid optimism that the weak economy may limit the Federal Reserve’s interest-rate hikes.
But the index is still down 14% year to date, and there’s a good chance it will resume its decline, for several reasons. First, the Fed has made clear that its first order of business is to fight inflation.
The consumer price index soared 9.1% in the 12 months through June, a 40-year high. And the Fed’s favored inflation indicator, the personal consumption expenditures price index, also hit a 40-year peak in June, at 6.8%.
With gasoline prices sliding, inflation may well have peaked. But with so many other prices still elevated and supply chains still out of whack, it’s unlikely to fall close to the Fed’s target of 2% anytime soon.
Continuing Rate Hikes
That means the central bank probably doesn’t soon take its foot off the rate-hike accelerator. And it’s inflation and rising rates that have depressed stocks so far this year.
When the Fed does pivot to cutting rates, that could mean the economy is in recession. This would obviously be a bad thing for stocks as it could crush earnings.
Plenty of economists are pointing out that the stock market is still vulnerable.
“Looking at the repricing of cyclical assets in the U.S. and European Union, we think the market might have been too complacent too soon in fading recession risks on expectations of a more accommodative monetary policy stance,” Goldman Sachs strategists wrote in a commentary.
“We think markets will be vulnerable to hawkish surprises, if inflation continues to struggle to reset, and to growth surprises, if the slowdown in activity results in a more prolonged/deeper downturn.”
Bank of America’s Doubts; JPMorgan Optimism
Bank of America strategists are skeptical about the recent stock rebound, too. “We view this as a bear-market rally, which is common, occurring 1.5 times on average per bear market since 1929,” they wrote in a commentary.
“August and September also have historically been the seasonally weakest months (up 0.1% on average in both August and September versus a 1.1% monthly average). We maintain our 3,600 year-end target on the S&P 500.”
The 3,600 level represent a 12% drop from the recent quote of 4,095.
To be sure, JPMorgan strategists are optimistic about stocks. “While the current equity multiple is in line with the historical median, we believe it is better than fairly valued, given the shift in industry mix to higher-quality companies,” they wrote in a commentary.
“Although the activity outlook remains challenging, we believe that the risk-reward for equities is looking more attractive as we move through the second half of the year.”
