The U.S. stocks rally faces a crucial moment next week, as investors eagerly await the Federal Reserve’s decision on what could be the final rate hike of its most aggressive monetary policy tightening cycle in decades. The year began with concerns that higher interest rates could lead to a recession, causing a decline in stocks. However, the U.S. economy has displayed remarkable resilience, and inflation concerns have eased, creating an ideal “Goldilocks scenario” that continues to support equities. The S&P 500 has surged nearly 19% year-to-date, hovering just 6% below its all-time high reached in January 2022.
Market participants widely expect the central bank to implement a 25 basis points rate hike at its upcoming meeting on July 26. However, investors are also hoping for signs that policymakers are increasingly confident in the cooling inflation, which could mitigate the need for further rate increases and bolster the positive sentiment that has buoyed stocks in recent weeks.
Cliff Corso, Chief Investment Officer at Advisors Asset Management, emphasizes the market’s macro-driven nature, with inflation being a pivotal factor. The Federal Reserve’s actions and statements next week are anticipated to have a profound impact on market sentiment.
The optimism surrounding a benign macroeconomic backdrop and a potential end to Fed tightening has led several analysts to revise their year-end stock market targets higher. Jonathan Golub of Credit Suisse recently raised the S&P 500 year-end target to 4,700, citing a stronger economic outlook and expectations of robust technology and communication service earnings. Similarly, Tom Lee of Fundstrat Global Advisors increased his year-end target to 4,825, while Ed Yardeni of Yardeni Research envisions the S&P 500 reaching 5,400 in the next 18 months.
Furthermore, a gauge tracking stock pickers’ exposure to equities is at its highest level since November 2021, indicating growing confidence among investors. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, attributes this to a favorable backdrop of lower inflation, resilient economic data, increased consumer confidence, and a declining dollar, all contributing to potential market gains.
Eric Freedman, Chief Investment Officer at U.S. Bank Wealth Management, has also increased his stock holdings, particularly in the tech sector, as he anticipates improved earnings amid a resilient economy. He highlights the support consumers have received from a tight job market and real wage gains, alongside significant progress in curbing inflation.
While the forecast for a recession was widespread earlier this year, Goldman Sachs has now reduced its probability of a U.S. recession starting in the next 12 months to 20%. The bank believes that easing inflation could provide the Federal Reserve with room to lower rates without triggering a downturn. However, some strategists remain cautious, expressing concerns about potential earnings shortfalls during the ongoing earnings season and uncertainties regarding inflation’s persistence.
Rising valuations have also been a topic of discussion, with the S&P 500 now trading at 20.8 times forward earnings, compared to around 16 times at the beginning of the year. Despite this, Christopher Tsai, Chief Investment Officer at Tsai Capital, remains optimistic about finding undervalued opportunities in the market. He has added several companies to his portfolio, including MSCI Inc. and Zoetis Inc., which he believes have been overlooked in the market’s surge.
As the Federal Reserve’s decision looms and the U.S. stocks rally faces a potential turning point, investors are closely watching economic indicators and inflation data for guidance. The outcome of the Fed’s meeting and its implications on the market could shape the trajectory of the stock market in the coming months.
