Stock Market Rally Persists: What Role Could the Fed Play in Its Eventual Slowdown?

After the recent meeting of the Federal Reserve, there are individuals who remain uncertain and worried about the market on Thursday, especially regarding the instability of technology stocks.

The Federal Reserve has chosen not to raise interest rates for the time being, but they plan to do so two times later on. Still, Chairman Jerome Powell tried to downplay the significance of this announcement. Even though the projection has been made, the market has yet to acknowledge the recommended two rate increases.

Some say don’t overthink this:

According to Tim Duy, the main economist at SGH Macro Advisors, it is not wise to assume that Powell’s statement suggests a willingness to be less rigid. He thinks that the choice to raise interest rates was already made in May and that misconceptions about the Fed’s plans have caused uncertainty. As a result, Duy suggests anticipating an increase in interest rates in July as well as either October or November.

Julian Emanuel, who led a research firm called Evercore ISI, has stated in a report that the Federal Reserve’s impact on the stock market may not be as significant as widely believed. The report suggests that Powell and the Fed lack the power to make any drastic decisions that could negatively affect the growth of the stock market.

Emanuel and his team have informed their clients that it is doubtful that the “momentum market” has come to a halt as stated by the Federal Reserve. They have cited the summer of 1999 as an example of a similar and unstable market. Their definition of a “momentum market” is one that is not easily swayed by outside influences like the decisions of the Federal Reserve.

Which elements will be responsible for the cessation of the robust and invincible bull market? The following is the inventory they have assembled:

• The reduction in anxiety and doubt indicated by the drop in the Cboe Volatility Index (VIX), which gauges the extent of instability in S&P 500 options, is known as complacency. The present VIX position is the lowest it has been in three years, standing at 13. However, according to Mark Hulbert of MarketWatch, this absence of pressure is advantageous for investors.
• Evercore is searching for a strong positive outlook in the market, as gauged by the American Association of Individual Investors Sentiment Survey. Ideally, they hope to observe over 60% of investors with a bullish perspective, yet the latest figures showed only 44.5%. Several surveys have detected an increase in optimistic investors that analysts have been taking notice of.
• Currently, the stock market is witnessing a pattern where small-cap stocks and banks are not performing as well, after technology had a period of superiority. Nonetheless, in June, the Russell 2000 index emerged as the front-runner, outpacing the bigger stocks. In May, the financial sector declined, as observed by the Financial Select Sector SPDR ETF, but has made a comeback in June.
• Evercore has shared a graph that shows the number of bearish outlooks on S&P 500 E-Mini futures ES00, -0.18% has reached an unparalleled point. If these pessimistic traders abandon their stance and purchase their positions, it could lead to an increase in stock prices.
• For a significant period, the quantity of individuals registering for unemployment assistance each week has been constant, with the number being equal to or surpassing 300,000. Lately, the amount of claims reached a new peak of 261,000, the highest it has been in almost 24 months. The last time it went beyond 300,000 was amid the pandemic’s middle in 2020. Additional information regarding these claims is anticipated to be provided on Thursday.

Emanuel and his team are closely monitoring specific signs that may indicate the market is approaching its highest point, particularly as the S&P 500 approaches the 4,450 level. Evercore published a note on June 4 suggesting that if the market maintains its current pace, their estimated price target for the S&P 500 by the end of the year could be achieved as early as July 4.Evercore recommends that investors maintain a positive outlook on particular stocks referred to as “momentum masters,” which comprise Alphabet (GOOGL), Zscaler (ZS), and Copa Holdings (CPA).

These stocks are part of the Russell 1000 index and have displayed impressive results in terms of performance, both in the current year and from March 30 onwards, positioning them among the top 20 companies within the index. Analysts have assigned all of these stocks an outperform rating.