Reuters: "Changing Fed rhetoric brings prospect of new highs for US stocks"

The Federal Reserve's shift in rhetoric toward looser monetary policy is bringing the prospect of new record highs for U.S. stocks, even as some investors fear the market may be rising too quickly, given uncertainties about the economy and corporate profits.

In the middle of this week, the Fed kept interest rates unchanged, signaling that the monetary tightening cycle of the past two years is over and that borrowing costs will ease next year.

According to Reuters, the US central bank's message was more optimistic than many investors expected. Falling Treasury yields supported the S&P 500 up nearly 1.4 percent on Wednesday, the index's biggest gain in a session since the day the Fed released its monetary policy statement from July 2022. The yield on 10-year U.S. Treasuries, which moves inversely to bond prices, was down 4 percent in late Wednesday trading, to its lowest level in four months.

"The Fed has ended rate hikes and the market couldn't be happier," said Matthew Miskin, one of the chief investment strategists at John Hancock Investment Management.

According to Reuters, the Federal Reserve's view is now more aligned with that of investors, although the markets' outlook remains much more optimistic. Seventeen of the nineteen Fed officials forecast the policy rate to be lower by the end of 2024 than it is now - with the median projection pointing to a decline to 4.6%, from the current range of 5.25%-5. 50% By comparison, Fed interest rate futures indicate a rate of 3.847%, according to LSEG data, the media trust writes.

With few major macroeconomic events expected for the rest of December, the S&P 500 may be forced to end the year at a new all-time high, above the one set in January 2022. The Dow Jones had already hit a new all-time high on Wednesday, along with Apple, the most valuable company in the world, according to Reuters.

Seasonal factors can also be another boon for stocks: Since 1950, December has been the third-best month for the S&P 500, with second-half gains typically outpacing first-half gains, according to LPL Financial data .

Another support for stocks could come from the movements of "bears", who abandon their positions (n.e. "bears" are those who bet on the decline, so abandoning/closing positions implies buying).

BofA Global Research data shows that leveraged funds are "not bullish and continue to struggle with" equity rallies after increasing their short positions. net during the S&P 500's fourth-quarter rally, according to a recent bank report obtained by Reuters.

"It's getting harder and harder for the bears to have anything to build on," said Jack Janasiewicz, a portfolio manager at Natixis Investment Managers Solutions, who recently increased his exposure to stocks to take advantage of the trends. Seasonal.

Still, many investors wonder how much of the Fed's relaxed approach has already been priced in during the S&P 500's more than 20 percent rally this year. And next year, the economy must confirm the scenario of falling inflation coupled with still robust growth, writes Reuters.

"For this year, the feeling was negative. Next year is expected to be a soft landing (not a cyclical downturn without a recession), multiples are higher, corporate earnings expectations are higher, so I think the environment will be more challenging," said Miskin, whose firm has a somewhat more defensive positioning.

The S&P 500 recently traded at 19.1x earnings estimates, compared to its long-term average of 15.6x. Earnings at S&P 500 companies are expected to grow 11.4% in 2024, after a 2.6% rise in 2023, according to LSEG Datastream data.

Mike Sanders, head of fixed income at Madison Investments, believes the market is "much, much more aggressive on rate cuts than what the Fed has been signaling.

"The key for the next six months will be whether inflation can continue to decline while the labor market remains stable," said Sanders, who has a bullish outlook for five-year Treasuries. "We need to be sure that the soft landing is not just a prelude to a hard landing," he added.

Jason Pride, head of investment strategies and research at Glenmede, believes the Fed's latest forecasts point to a soft landing. "Even so, it has never happened that keeping interest rates high for so long did not cause collateral damage to the economy," Pride said, quoted by Reuters.