The S&P 500 index continues to soar to record levels, despite the Federal Reserve signaling an end to hopes of a March rate cut. This disconnect between interest rates and equity markets has left many investors wondering about the underlying factors driving this trend.
Adam Kobeissi, author of The Kobeissi Letter, pointed out that the S&P 500 is just 10 points away from a new all-time high, even as expectations for interest rate cuts have been scaled back. The chart of the SPDR S&P 500 ETF (SPY) shows a clear trend that highlights the impact of interest rates on equity markets.
Looking back at the historical data, it is evident that as the Fed aggressively raised interest rates through 2022, the index moved lower. However, as the Fed signaled a less aggressive pace of rate hikes in 2023, investors started to push the index higher. The Fed’s final hike in July 2023 led to a significant decline in the index, but the subsequent dovish signals from the central bank sparked a rally.
The recent shift towards a more cautious approach by the Fed has raised hopes of rate cuts in 2024. Despite the Fed’s reluctance to cut rates at the upcoming meeting, the market continues to climb higher. Kobeissi attributes this resilience to the historic strength of AI hype, which has been a driving force behind the market’s performance.
With the earnings season for the final quarter of 2023 yielding positive results for the majority of companies, the outlook for the equity markets remains optimistic. Companies like Nvidia Corporation (NVDA) have seen significant gains in market cap based on solid performance and guidance. The tech sector, including giants like Amazon.com Inc (AMZN) and Meta Platforms Inc (META), has also reported stronger than expected earnings.
While some outliers like Tesla Inc (TSLA) have faced challenges, the overall performance of the tech sector has been impressive. The Invesco QQQ Trust (QQQ), which closely tracks big tech stocks, has outperformed the broader market, reflecting the strength of the tech sector.
As the market continues to ride the wave of AI hype and solid earnings, investors are keeping a close eye on the Fed’s future policy decisions. The intersection of technology, AI, and monetary policy will likely shape the trajectory of the equity markets in the coming months.
