Rania Gule, Market Analyst at XS.com
Stock prices broke their short-term losing streak yesterday, with the S&P 500 index rising by 0.86%. The market continued to follow its record high set last week, albeit at a very slow pace. Today, Thursday, it is trading at $5259, after stock prices were affected by the interest rate decision made by the Federal Open Market Committee last Wednesday.
Investors are gearing up this week for the release of the Core Personal Consumption Expenditures Index numbers tomorrow, Friday, and in my view, market volatility will be weak, and market reaction limited due to tomorrow’s holiday with the approaching long weekend, so the data’s effects may extend to the beginning of next week.
Today, S&P 500 futures rose by 0.1%, indicating a neutral opening for the index. The question here is: will this upward trend continue? The answer is somewhat contradictory; a downward correction seems possible, but the overall trend remains upward.
So, despite concerns about stock valuations, the market has risen to new record levels, fueled by hopes for the Federal Reserve’s monetary policy stance and the AI revolution. Last week, it was all about the Federal Reserve, and thus the market’s reaction was positive. It seems to me that the S&P 500 index is still moving cautiously at the moment.
While the indices have hit new record levels, most stocks have been moving sideways. This could be a pattern signaling a peak before a deep price correction. However, prices have not given any definite negative signals. So, the possibility of a trend reversal to the downside cannot be ruled out at any time.
In my view, investor sentiment has improved significantly, and risk appetite in the markets has increased. An investor sentiment survey released by AAII yesterday showed that 50.0% of individual investors are optimistic, while only 22.4% are pessimistic, down from 27.2% last week. The AAII index is a contrarian indicator, meaning that extremely bullish readings may indicate excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for market rallies.
Appetite for stocks and cryptocurrencies has returned, indicating a significant risk appetite in general. I believe traders are confident about the upcoming interest rate cuts. Strong growth in the United States will not be scary as long as inflation continues to decline. Even the recent rise in inflation is not causing much concern, as it is believed to be temporary.
The Federal Reserve is expected to cut interest rates in June for the first time, and yesterday’s strong demand in the 5-year bond auction in the United States led to a slight decline in the S&P 500 index from its peak due to continued geopolitical tensions, weakening the mood for some companies expecting changes in their trading methods. The most concerned are automotive industry companies. Coal, gasoline, and grain transport companies will also be affected.
However, if things calm down, the S&P 500 index could register its fifth consecutive monthly gain, which hasn’t happened since 2013. The main risks threatening this rise lie in renewed downward revisions to the Federal Reserve’s expectations and the possibility of deteriorating earnings expectations.
What’s also interesting regarding expectations of a rate cut by the Federal Reserve is that expectations for three rate cuts are still on the table, but only if the first-rate cut happens by summer. Many investors believe that if the Federal Reserve doesn’t cut by June or July, there won’t be any cuts this year. So, it’s either three cuts or nothing.
In the baseline scenario of three cuts, I expect stock prices to continue rising beyond the technology sector, which would make the S&P 500 index catch up with the regular price-weighted index. It is also supposed that gains will widen in favor of small and medium-sized stocks, as well as commodities like gold, copper, and oil in the medium term.
At the same time, bad news continued for Apple regarding the company’s iPhone sales in China, which fell by 33% in February compared to the previous year. Apple’s stock fell below $170 per share yesterday, entering a medium-term bearish consolidation zone, with a greater chance of seeing further declines in Apple rather than the opposite. Apple will unveil its AI strategy on June 10. Until then, investors will remain skeptical about investing in its stocks.
Finally, the dollar index rose due to increasing tension and anticipation ahead of the release of Core Personal Consumption Expenditures Index data on Friday, and the fact that most Western traders will be off for the Easter holiday. Therefore, there may be a potential negative surprise for the markets.
