Stock market milestone sets the stage for more gains

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Nothing can stop the stock market, not even the Federal Reserve. Don’t expect the rally to end there.

If investors wanted an excuse to take money off the table last week, they had one. On Wednesday, the Fed announced a pause in its interest rate hikes, as expected, with a very big “but” – its so-called dot chart signaled another two-quarter point hike before it did. be completed.

Logic would say that this should have driven the market down. THE

S&P 500 Index
entered Wednesday already up 20% from its bear market low, with much of that rally driven by hopes that the Fed would hit the pause button. At the very least, there should have been a “sell the news” reaction to accompany the bad news – the possibility, perhaps the likelihood, of further rate increases.

There were none. The S&P 500 gained 2.6% over the week, while the

Dow Jones Industrial Average
increased by 1.3% and the

Nasdaq Compound
climbed 3.2%.

So why all these purchases? The Fed is still close to the end of its rate hikes, which would allow economic growth and corporate earnings to stabilize or even pick up for many sectors. Meanwhile, bond market rates could fall.

“The smoke hasn’t cleared, but the buoyant market remains,” wrote Evercore ISI strategist Julian Emanuel.

This was enough for the S&P 500 to break through a number of key levels. After cracking 4200 weeks ago, it is now well above 4300, where it peaked in August after Fed Chairman Jerome Powell halted a summer rally by reminding markets that rate hikes weren’t nearly finished. It ended Friday a hair below Thursday’s close of 4425, its highest level since April 2022, a sign that market participants are confident enough in the outlook to keep buying stocks.

The risk seems low, at least for now. After nearly a dozen attempts to break 4200 since the start of the year, this number is likely to become a support level for the S&P 500, should it turn lower. And if this were to hold, the S&P 500 would likely be preparing to rally again.

BCA Research chief strategist Doug Peta calls 4200 “clearly a pretty high level. The S&P 500 couldn’t get through that. Once this is done, resistance becomes support.

The market is never without risk, and it certainly isn’t now. Gains this year have been driven by just a handful of stocks, a risk should those stocks falter. The S&P 500 is also trading at 19 times forward 12-month earnings, while government bond yields are hitting 5%, making equity returns less attractive.

“I think valuations by historical standards are richer relative to macro risk and rates,” says Keith Lerner, co-chief investment officer at

Truist
.

Still, for the market to experience a significant decline, it would clearly need a real catalyst. This could take the form of poor economic data or earnings. Given “the lagged effects of tighter monetary policy, with a recession looming, you’ll have earnings expectations ripe for disappointment,” says Peta. “So stock performance becomes really fragile.”

Not yet, however. With the wind at the market’s back, a decline would only present a buying opportunity, especially if the market is holding at key levels. “We think pullbacks are buying opportunities here,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

While it usually doesn’t pay to fight the Fed, this is one of those times when you don’t want to fight the tape.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com