The US stock market is hitting new record highs

The S&P 500 recorded its best week since April and reached a record close, driven by strong corporate earnings and a reduced likelihood of further Fed rate hikes. A weak US employment report triggered this. Bad news from the labour market turned out to be good news for US stock indices.

According to FactSet, of the 440 S&P 500 companies that have already reported, 86% beat forecasts. Corporate profit growth exceeds 50%, which is the best result since the second quarter of 2021. Wall Street analysts’ estimates were exceeded by 29%. Such impressive results have not been seen since 2008.

The positive earnings reports are reigniting investor interest in Big Tech. While the S&P 500 and the Dow Jones Index gained more than 3% over the week, the Nasdaq Composite rose by more than 5%. The rotation towards shares of companies sensitive to the state of the economy is reversing, which is further fuelling FOMO.

There is a sense of euphoria in the stock market, with the Bank of America noting that the bull-to-bear ratio has reached its highest since 2021. This is a worrying sign, as any unpleasant surprises could derail the stock market. The conflict in the Middle East and the release of US inflation data for July are causes for concern.

Formally, the agreement between Iran and Oman will lead to the reopening of the Strait of Hormuz. However, Tehran is insisting that its demands regarding reparations, the withdrawal of US troops from the region and the lifting of Western sanctions be met before this can happen. These demands are excessive, which heightens the risks of the conflict escalating. The rise in geopolitical risks could negatively impact the S&P 500.

Could the acceleration of inflation in the US as well? A modest rise in consumer prices and the core inflation indicator on a month-on-month basis is expected in July. This would effectively rule out any tightening by the Fed in September. However, with accelerating CPI, the likelihood of a federal funds rate hike will rise again, creating a headwind for the S&P 500.

Overall, strong corporate earnings and the reduced likelihood of further Fed rate hikes are providing support for the US equity market. However, the euphoria that has swept through the market leaves the S&P 500 vulnerable to unpleasant surprises. 

Summary: The S&P 500 has hit a new record high on the back of strong earnings and hopes for a dovish Fed, but the market’s euphoria leaves it vulnerable to inflation and geopolitical risks.