While the Federal Reserve refuses to acknowledge victory in the fight against inflation, the stock market has another reason to feel optimistic about the future.
The market found plenty to like this week. Apple announced that its new iPhones will have artificial intelligence features, raising hopes that consumers will be willing to pay the upgrade price when the iPhone 16 launches, sending its stock up 8.7% this week.
Technology Select Sector SPDR
Exchange-traded funds rose 5.6%.
Inflation data also provided reason for optimism: The Consumer Price Index rose 3.3% year-over-year in May, below the 3.4% expected and down from 3.4% in April. The data, released Wednesday morning, sent the S&P 500 up 0.9%, and held on to gains through the close, despite some questioning the strength of the gains.
“It seems a little odd that you get a 3.3 instead of a 3.4 and the market is worth $1 trillion more,” said Adam Parker, founder of Trivariate Research, about the S&P 500.
Advertisement – Scroll to continue
The Fed also appears unfazed by the inflation data. At its meeting on Wednesday, it stressed that inflation is still not close enough to its 2% target for interest rates to be cut. The Fed’s “dot plot” indicates one rate cut in the second half of this year, down from three at its last meeting.
But investors are confident the Fed will eventually cut rates and that economic growth will continue. They know it’s only a matter of time before the Fed stops hiking and starts cutting rates. “I don’t really care if the cut comes in July or September,” says Scott Kronert, a strategist at Citigroup Inc. “What I care about is that a cut is coming and the Fed has to ease up on restrictions.”
They also need the stock market to support its still-high valuations. The S&P 500 trades at 21 times next year’s expected earnings, at the high end of its range since the Fed began raising rates in early 2022. But that’s no reason to get out of stocks. “High markets can stay high for a long time,” writes Julian Emanuel, a strategist at Evercore ISI. His data shows that in 1998 and 2020, the index traded at more than 20 times earnings and then rallied for hundreds of days before finally peaking out and experiencing big declines.
Advertisement – Scroll to continue
Doug Ramsey, chief investment officer at Leuthold Group, said even recent weakness in certain areas of the market, such as consumer, manufacturing and bank stocks, isn’t worrying enough to get out of stocks, noting that he remains optimistic about the market because most sector indexes are well supported. “The case for holding stocks remains ‘unbalanced,'” he wrote.
With or without the Fed.
Write Jacob Sonenshine jacob.sonenshine@barrons.com
