XM does not provide services to residents of the United States of America.

Can stocks keep defying gravity? – Stock Markets

  • US stock indices sail towards successive record highs

  • Hawkish Fed doesn’t scare bulls as volatility remains inexistent

  • Valuations are historically stretched but earnings keep growing


High after high

All major US indices are having an astonishing year, recording consecutive all-time highs as the economy seems more and more likely to achieve a soft-landing. It has been more than 20 months now since the stock market experienced a sizable correction, but the bulls appear unhindered.

Lately, stocks seem to have found a way to rally even in cases where data suggests otherwise. Such an incident was the market's reaction on Wednesday, when stocks finished the session significantly higher despite a hawkish FOMC meeting. The updated dot plot indicated one rate cut for the year, down from three in its previous version, which is considered bad news for risk-sensitive assets.

It could be argued that the downside surprise in inflation data earlier in the day could justify those gains, but equities were also advancing ahead of the event, even after the stronger NFP on Friday had tilted risks to the hawkish side. In any case, the rally looks bulletproof given that US Treasury yields are higher compared to the start of the year, while market pricing has shifted from six to almost two rate cuts at the moment of writing.

What can stand in its way?

The relentless rally to uncharted waters would be expected to increase volatility in the equity world, but surprisingly this has not been the case. On the contrary, the CBOE Volatility Index (VIX), Wall Street’s fear gauge, has been hovering near four-year lows despite the consecutive record highs, suggesting that investors have not been actively positioning for a pullback.

This phenomenon could be explained by the fact that every recent attempt for a downside correction has been shuttered, leading to severe losses for the bears. At the same time, it is not common for the US stock market to decline ahead of elections. Hence, the major risk moving forward is an exogenous event that could derail the rate-cut process and spoil the soft-landing scenario.

Valuations are rosy but earnings keep growing

This year’s rally has pushed major stock indices to ‘expensive’ territories not only from a price perspective but also relative to the value they are offering. Currently, the S&P 500 is trading at 20.7 times what analysts project earnings to be over the next twelve months, multiples only seen during the pandemic and dot-com bubble.

On the one hand, valuations so stretched should ring alarm bells over an impending correction. However, for now, it seems that investors have been attributing them to corporate earnings constantly beating expectations and the AI frenzy. Meanwhile, higher multiples could be also partially justified by the increasing weighting of tech stocks in US indices.

Related Assets

Latest News

Technical Analysis – WTI crude oil creates bearish wave


Market Comment – Stock market correction picks up speed


Technical Analysis – EURUSD pulls back towards converging SMAs



Technical Analysis – Will USDCAD exit the range?


Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.