As the S & P 500 stays above 4000 and the fear index has fallen to one of its lowest levels this year, many investors on Wall Street are wondering whether U. S. stocks have hit bottom. Especially given that the Fed has already signalled that it will slow the pace of interest rate increases in the future.

But the truth is that U. S. inflation remains near a 40-year high, and most economists expect the economy to fall into recession next year.

U. S. stocks have performed well over the past six weeks, with the S & P 500 continuing to climb after a big rally in October, so it has been trading above its 200-day moving average for weeks. More importantly, the Dow has led the market higher since mid-October, up more than 19% from its low in late September and on the verge of pulling out of the bear market.

On Friday, some analysts worried that the recent gains could mean U. S. stocks were overbought. "my estimate is that the market is slightly overbought on a medium-term basis, but may be completely overbought in early December," said independent analyst Helen Meisler. "

She is not the only one who expects U. S. stocks to experience another correction soon. Morgan Stanley's Mike Wilson, who has become one of the most closely watched analysts on Wall Street after predicting a severe sell-off this year, said earlier this week that he expected the S & P to bottom out around 3000 in the first quarter of next year, creating an excellent buying opportunity.

With so much uncertainty besetting the outlook for factors such as the stock market, corporate profits, the economy and inflation, investors may need to analyze the following before deciding whether the investable low of the stock market is really here.

First, the weakening of corporate profit expectations may hurt the stock market.

Earlier this month, equity strategists at Goldman Sachs Group Group and BofA Securities warned that they expected corporate earnings growth to stagnate next year. While analysts and companies have downgraded their profit guidance, many on Wall Street expect more cuts as time moves into next year.

That could put more downward pressure on the stock market, which has stumbled so far this year, thanks in large part to soaring profits from US oil and gas companies, even though corporate earnings growth has slowed so far this year.

Historical data show that the stock market will not bottom out before the Fed cuts interest rates.

A chart produced by Bank of America Corporation analysts has appeared in front of people many times this year. The chart shows that over the past 70 years, US stocks have tended not to hit bottom before the Fed cut interest rates.

Although the lowest point of the stock market crash triggered by the COVID-19 epidemic in March 2020 almost coincided with the Fed's decision to cut interest rates to zero and unleash massive monetary stimulus, it is usually after the Fed has cut interest rates at least a few times that the stock market begins to rise for a long time.

But then again, as market strategists like to say, historical data do not guarantee future performance.

The Fed's benchmark policy rate may exceed investors' expectations

The market now expects interest rates to peak in the middle of next year, and the first rate cut is most likely to come in the fourth quarter of next year, according to the FedWatch tool of the company.

Mohannad Aama, a portfolio manager at Beam Capital, points out that since inflation is still well above the Fed's 2 per cent target, the Fed may need to keep interest rates high for longer, causing more pain for the stock market.

"everyone is looking forward to interest rate cuts in the second half of 2023, however, keeping rates high for a longer period of time will prove to be sustained throughout 2023, although most people have not yet modeled it," Aama said. "

Market strategists say keeping interest rates high for a longer period of time is bad news for growth stocks and the Nasdaq, which performed well in an era of low interest rates.

But if inflation does not subside quickly, the Fed may have no choice but to stick to it, as several senior Fed officials, including Chairman Powell, said in public comments. While the market celebrates a slightly lower-than-expected inflation reading in October, Aama believes wage growth has not yet peaked, which could put pressure on factors such as prices.

Earlier this month, a team of Bank of America Corporation analysts shared a model with clients that suggested that inflation might not subside significantly until 2024. Senior Fed policymakers expect interest rates to peak next year, according to the Fed's latest "bitmap" of interest rate forecasts.

But the Fed's own forecasts have rarely been met, especially in recent years. For example, after former US President Donald Trump lashed out at the Fed and shook the repo market, the Fed backed down the last time it tried to raise interest rates substantially. In the end, the COVID-19 epidemic encouraged the Federal Reserve to cut interest rates to zero.

The bond market is still heralding a future recession

Market analysts say hopes that the US economy may avoid a severe recession will undoubtedly help prop up equities, but in the bond market, the increasingly inverted Treasury yield curve is sending the opposite signal.

On Friday, the yield on the two-year note was 75 basis points higher than the yield on the 10-year note, about the worst upside-down in more than 40 years.

At this point, both the 2-year / 10-year yield curve and the 3-month / 10-year yield curve have been substantially reversed. The upside-down yield is seen as a reliable indicator of recession, and historical data show that the reversal of the yield curve of 3-month / 10-year Treasuries is even more effective than the reversal of the yield curve of 2-year / 10-year Treasuries. it is more effective in predicting the coming recession.

With mixed signals from the market, market strategists say investors should pay more attention to the bond market.

Steve Sosnick, chief strategist at Yitou Securities, said: "this is not a perfect indicator, but when there is a difference between the stock market and the bond market, I tend to believe in the bond market." "

The conflict between Russia and Ukraine is still an unpredictable but influential factor

To be sure, the rapid resolution of the conflict between Russia and Ukraine could push up global stock markets, as the conflict disrupts the flow of key commodities, including crude oil, natural gas and wheat, and helps stimulate inflation around the world.

The conflict between the two sides has escalated for nine months and there is no momentum to ease, which may be very, very bad for the market. Earlier, Ukrainian President Zelanski stressed that Ukrainian forces have adhered to the "key front" in all directions. "in fact, I think the biggest risk for the market is that Ukraine continues to demonstrate its capabilities to the world," said Marko Papic, an analyst at Clocktower Group. Further success in Ukraine may prompt Russia to respond otherwise. This will be the biggest risk for the US stock market. "