© Reuters. FILE PHOTO: The New York Stock Exchange building seen from Broad Street in Lower Manhattan in New York, January 20, 2016. REUTERS/Mike Segar/File Photo
By Lewis Krauskopf
(Reuters) -A scorching year-end rally has taken the country to a new 2023 closing high as investors bet the Federal Reserve will no longer raise interest rates and the U.S. economy will remain resilient in the face of tighter monetary policy.
The benchmark index closed at 4,594.63, almost 6 points above its previous closing high for 2023 set in late July. The index gained 0.6% on Friday after bullish investors became more confident that the rates cycle had peaked following comments from Federal Reserve Chair Jerome Powell.
Signs that inflation is cooling after hitting a four-decade high last year have made investors more confident that the Federal Reserve will begin cutting rates sooner than expected.
At the same time, the Federal Reserve's aggressive rate increases so far appear to have done little damage to the U.S. economy, despite fears that tighter monetary policy would hurt growth. The S&P 500 is up more than 19% so far this year after posting its biggest monthly gain in more than a year in November. The index was approximately 4% below its January 2022 all-time closing high.
The stock has faced several crises this year, starting with the implosion of Silicon Valley Bank in March that raised concerns about the health of the broader banking system.
A legislative showdown over raising the U.S. debt ceiling became a key concern for investors months later, and stocks gained support once a deal was reached.
The S&P 500 hit its previous 2023 closing high on July 31, also driven in part by enthusiasm over advances in artificial intelligence technology.
A steady rise in Treasury yields – which dulled the appeal of stocks compared to bonds and other investments – began to erode those gains, resulting in a sell-off that eventually erased more than half of the stock's advance. index so far this year.
However, many investors emerged from the Nov. 1 Federal Reserve meeting more confident that the central bank was close to concluding its rate hikes. Data on Nov. 14 showed consumer prices were unchanged month-on-month in October, the first such reading in more than a year, prompting a sizeable rally in stocks.
Federal funds futures, a security widely used to hedge short-term interest rate risk, imply a federal funds rate of 4.54% by the end of July, up from 5.12% expected three months ago for that period, according to LSEG data.
The cooling of inflation has been accompanied by little economic damage that many expected would come from the Federal Reserve's rate hikes, giving rise to hopes of a so-called Goldilocks scenario in which the central bank is able to curb inflation. growth in consumer prices without seriously harming growth. . The economy appears to have avoided a recession this year that was widely forecast in early 2023, although growth in key areas such as employment has slowed. Citigroup's Economic Surprise Index, which measures the performance of economic data against expectations, has been positive for virtually all of 2023.
Of course, some investors are concerned that the cumulative effects of the Fed's 525 basis point tightening are just beginning to play out and will eventually cool growth much more than is currently expected.
A group of massive stocks has been the key driver of most of the S&P 500's gains in 2023 thanks to their huge weightings in the index. The so-called “Magnificent Seven”: Apple (NASDAQ:), Microsoft (NASDAQ:), Alphabet (NASDAQ:), Amazon (NASDAQ:), Nvidia (NASDAQ:), Meta Platforms (NASDAQ:) and Tesla (NASDAQ:). 🙂 — have seen stock market gains of between 47% and 220% so far this year. Companies that perceived security as an investment, due to their size and competitive advantages, benefited the stock, while some of them were also fueled by enthusiasm for the profit potential of artificial intelligence. The outperformance of mega-caps has increased their combined weight to more than a quarter of the entire S&P 500, meaning stock movements have an outsized influence on the benchmark index.
To be sure, the S&P 500's rapid rise has also made it highly valued compared to its historical levels, which could be a headwind to the rally.
The S&P 500 currently trades at about 19 times forward earnings estimates, compared to a historical average of 15.6 times.
