The stock market today finished another positive week on Friday with the S&P 500 index rising to its highest level since March of 2022. Major indexes closed higher for the day and week, extending a rally that has now lasted 5 straight weeks.
Investor optimism continues to grow around the possibility that the Federal Reserve may start cutting interest rates in the first half of 2024. This hope has fueled market gains throughout November, making it the best month of the year so far.
The S&P 500 gained 0.6% on Friday to close at 4,594.63, passing its previous 2022 high from July. The Dow Jones Industrial Average rose 0.8% to finish at 36,245.50, while the tech-heavy Nasdaq composite added 0.6% to end the week at 14,305.03.
Advancing stocks outpaced decliners by a ratio of nearly 6-to-1 on the New York Stock Exchange.
Driving the Optimism Around an Earlier Fed Rate Cut
Behind the ongoing rally is a growing belief among investors that the Fed may cut rates sooner than previously expected. Specifically, expectations have shifted to the central bank making its first cut at the end of Q1 2024 rather than later in the year.
This hope comes as inflation data shows a continued cooling since mid-2022 when the Fed started aggressively hiking rates to combat high prices. The latest sign was the Fed’s favored inflation gauge, the personal consumption expenditures (PCE) price index, rising 6% year-over-year in October – down from 6.3% in September.
Notable readings on economic growth and consumer confidence have also exceeded forecasts lately. This has raised optimism around the Fed achieving a “soft landing” – taming inflation without sparking a recession.
In a speech on Friday, Fed Chair Jerome Powell noted it’s too early to determine if rates are sufficiently high to control inflation. However, he did not dash hopes of a potential cut next spring. Comments from other Fed officials have also indicated rates may not rise much further than currently expected.
The market now sees a nearly 56% probability of a March rate cut, a big jump from 21% just one week ago, according to CME Group data.
Ongoing Economic Updates Maintain Momentum
The stock market rally kicked into higher gear around mid-October when a string of encouraging inflation and retail sales data initially sparked speculation around Fed easing. Solid Q3 earnings results from major banks and big tech companies provided an extra boost.
This momentum carried through November amid more strong economic updates:
- Robust October retail sales growth
- Back-to-back reads on hot job growth
- An unexpected climb in consumer confidence
- Cooling inflation confirming the desired price trend
The upcoming week holds several key reports – most importantly the November jobs report on Friday – that could maintain the current trajectory if results continue exceeding estimates.
One downside risk is that Fed officials may talk up rates rising higher than markets expect or dampen imminent cut predictions. But absent more hawkish signals, optimism seems poised to further infiltrate Wall Street.
Key Stock Market Implications
The market’s run of good fortune has provided relief specifically for rate-sensitive sectors like technology and housing that were hit hard in 2022’s bear market.
Higher rates make future earnings less valuable today. So when rates fall, future profits get discounted less. This disproportionately aids high-growth companies.
For example, the tech-focused Nasdaq 100 index entered a bull market in November, usually defined as a 20% rise from a recent low. The index is now up nearly 30% from its October 12 bottom.
In another sign of the pivot toward risk-on positioning, the small-cap focused Russell 2000 entered positive return territory for the year on Friday for the first time since April. Smaller companies are viewed as riskier investments with greater growth potential.
Even with the substantial bounce off lows, analysts see room for stocks to climb further in 2023 if the Fed engineers the desired soft landing. Multiple Wall Street firms have recently upgraded their S&P 500 targets for next year.
The average year-end 2023 forecast now stands at about 4,100. That’s nearly 9% above the index’s Black Friday finish. Hitting that mark would translate to a solid double-digit total return when including dividends.
Optimism Rising But Risks Remain
The past month’s eye-catching stock rebound leaves major indexes on pace to close out 2022 on a high note following substantial losses earlier in the year.
Bulls have regained control of the market narrative thanks to cooling inflation data and resilience in consumer spending. However, risks still lurk around the Fed’s ability to stick an elusive soft landing without sparking a downturn.
While recent history supports optimism around further gains, more punishing losses could quickly return if the economy heads south. Investors face navigating crosscurrents between caution and opportunity as 2023 approaches.