Wall Street is rejoicing as the Federal Reserve’s half-point rate cut triggers a market rally, even amidst rising apprehensions about inflated valuations.
What Happened: The Federal Reserve’s lenient approach has uplifted the economic forecast, resulting in a jump in U.S. stocks and commodities, and a reduction in bond market volatility.
The Nasdaq 100 experienced its most significant two-week surge since November, dismissing worries that the Fed chief had postponed concluding a two-year fight against inflation.
Nonetheless, inflated valuations are emerging as a substantial hurdle, leaving little margin for mistakes if any event disrupts investors’ large-scale bets, reports Bloomberg.
A model adjusting S&P 500 earnings yields and 10-year Treasury rates for inflation suggests that cross-asset pricing is now higher than at the commencement of all previous 14 Fed easing cycles, typically linked with recessions.
Also Read: Fed Chair Powell’s Signal Sets Stage For Global Rate Cuts As Central Banks Aim To Revive Economy
Lauren Goodwin, economist and chief market strategist at New York Life Investments, cautions that while high prices are just one factor contributing to a multifaceted market environment, they amplify market vulnerability if any other aspect goes awry.
U.S. stocks surged, propelling the S&P 500’s total return for 2024 above 20%. The index leaped 1.7% on Thursday, marking its 39th record close of the year, following the Fed’s rate cut and data indicating labor market resilience.
However, many stock-valuation measures are stretched, including the Buffett indicator, which divides the total market capitalization of U.S. stocks by the total dollar value of the nation’s GDP. This indicator is near a record high, at a time when Warren Buffett has recently downsized some high-profile equity holdings.
Why It Matters: Despite these concerns, the rally in U.S. stocks persists, justified by earnings growth keeping pace with high valuations.
However, the potential for disappointment is high in the Treasury market, where futures trading continues to anticipate more interest-rate cuts than Fed policymakers themselves see as likely over the next year.
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