Source: Golden Ten Data

Wall Street bulls believe that even without interest rate cuts, US stocks may resume their upward momentum. Supported by strong growth in the global economy, the US stock market is likely to continue its record-breaking rise even if bets on the Fed cutting interest rates this year are abandoned.

After the S&P 500 experienced its best week since November last year, bringing it back close to the record high set in March of this year, investors are faced with a judgment: whether the weakness in the US stock market earlier this month was only a temporary fluctuation, or whether postponed policy easing will once again drag down the market.

Some investors think the answer can be traced back to the market script in the 1990s, when stocks more than tripled in value even though interest rates hovered around current levels for many years. At the time, steady US economic growth provided a good foundation for US stocks. Although the current global economic outlook is more uncertain, there is still enough momentum to push US stocks forward.

Zehrid Osmani, fund manager of the Martin Currie Fund, said in an interview: “We need to assess what may happen in the market if the number of interest rate cuts decreases during the year. If the US economy is better than expected, then after a short period of market fluctuations, this may support the rise in US stocks.”

Prior to the rise this past week, US stocks had been on hiatus throughout April. At first, market expectations for policy easing triggered record gains in US and European stock markets at the end of 2023. However, traders at the beginning of the year expected the Federal Reserve to cut interest rates by 25 basis points at least six times this year, but it has now been reduced to only one. The reason is that US inflation continues to be high, causing people to worry that a long period of austerity policies will put pressure on the economy and the profit potential of enterprises.

Rising geopolitical risks and uncertainty about global election results have also increased market volatility, prompting investors to seek hedging tools to prevent possible sharp market pullbacks.

Despite this, global economic confidence has increased this year, mainly due to US economic growth and signs of economic recovery in other countries. The International Monetary Fund raised its global economic growth forecast this month, and a foreign media survey showed that Eurozone economic growth is expected to pick up starting in 2025.

David Mazza, CEO of Roundhill Investments, said that although recent data showed that the growth rate of the US economy slowed sharply in the first quarter compared to the fourth quarter of last year, these data should be “treated with caution” because it masks the resilience of demand in the US economy.

Mazza said, “Overall, I think we can regain our optimism even without interest rate cuts, but the process may be more difficult.”

After the S&P 500 hit a record high in the first quarter, some short-term pullbacks were seen as healthy adjustments. According to data compiled by foreign media, between 1991 and 1998, the index fell 5% several times before rebounding several times to new highs, but there was no correction of more than 10%.

However, compared to the 1990s, one major drawback of today's S&P 500 is that its constituent stocks are more concentrated. Currently, the top five companies by market capitalization—Microsoft, Apple, Nvidia, Amazon, and Meta Platforms—all come from the technology industry and account for nearly a quarter of the total market capitalization, which makes the index prone to greater fluctuations.

An analysis by the Bank of Montreal Capital Markets (BMO Capital Markets) in Canada shows that the performance of the S&P 500 index is often positively correlated with higher US Treasury yields. Since 1990, when 10-year US Treasury yields are above 6%, the average annualized return of the index is close to 15%, while when the yield falls below 4%, the average annualized return of the index falls to 7.7%.

BMO's chief investment strategist Brian Belski wrote in a report to clients: “This makes sense to us because lower interest rates may reflect slow economic growth, and vice versa.”

Last week, 10-year US Treasury yields hit this year's high of 4.74% due to limited policy easing expectations.

Preliminary results for the current earnings season show that in an environment of high interest rates, the performance of about 81% of US companies still exceeded expectations. According to data compiled intelligently by foreign media, US corporate profits are expected to increase 4.7% year-on-year in the first quarter, higher than the 3.8% estimate before the earnings season.

According to the data, analysts expect profits of S&P 500 companies to increase 8% in 2024 and 14% in 2025, compared to a moderate increase last year.

Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management, said that if the Federal Reserve cuts zero interest rates throughout the year in 2024, then the profit forecast for 2025 may be even higher. He believes that considering that the market will reflect these predictions in advance, this will further boost US stocks.

Bank of America strategist Ohsung Kwon believes that even without interest rate cuts, the booming economy will still support the stock market. He said that the biggest threat to this premise will be that inflation remains high while the economy slows down.

Kwon said, “If US inflation is sticky due to economic momentum, it's not necessarily bad for US stocks. But stagflation is the real threat.”

edit/lambor