The 5.6 Trillion-Dollar Catalyst: Can Stocks Soar by Year-End?

Despite concerns about various economic factors, including stubborn inflation, a surge in oil prices, Federal Reserve hawkishness, and weak growth in China, the S&P 500 is set to begin Friday just under 2% below its 2023 peak.

This resilience is indeed impressive. While the successful IPO of Arm Holdings’ ARM this week was expected to boost sentiment, the latest rally has occurred despite benchmark bond yields, which have recently been considered a market challenge, hovering near 16-year highs.

A key reason for the market’s ability to withstand rising implied borrowing costs can be seen in the ICE BofAML MOVE index, which measures expected volatility in Treasury bonds. This week, the MOVE index dropped below 100, reaching its lowest point in 18 months and only half the level it reached during the regional bank crisis in March.

This increased calmness in the bond market is reflected in equities, where the CBOE VIX, a measure of expected S&P 500 volatility, is below 13 and approaching its lowest level since January 2020.

While it’s often customary to view such calmness as complacency, there are four compelling reasons for bullish optimism:

1. Technical Support: The S&P 500 has recently risen above its 50-day moving average, a positive technical signal. Additionally, the 14-day relative strength index (RSI), a momentum indicator, is trending upward but remains comfortably below overbought levels at 56.
2. Central Bank Actions: The equity rally following the European Central Bank’s dovish stance is seen as a positive sign for when the Federal Reserve signals an end to tightening. History suggests that this could lead to further equity gains.
3. Company Earnings: Earnings forecasts for S&P 500 companies have been improving, with third-quarter earnings per share expected to rise by 0.5%. If realized, this would mark the first year-over-year earnings growth reported by the index since Q3 2022.
4. Financial Strength: Money market funds are currently holding a record $5.625 trillion, indicating ample financial resources. This suggests that there is sufficient cash available to support a sustained upward trend in the market.

In summary, while market tranquility might raise concerns of complacency, these four factors provide compelling reasons for bulls to maintain their confidence. Investors are closely monitoring technical indicators, central bank actions, earnings growth, and available financial resources to inform their positive outlook.