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Analysis: Equities Surge Amidst Hope for Gentle Economic Landing Analysis: Equities Surge Amidst Hope for Gentle Economic Landing

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Fed Outlook Stirs Optimism

Yesterday, major equity indices soared approximately 1%, hitting new highs fueled by the Fed’s decision to maintain unchanged rates, in line with expectations. The Fed’s commitment to a projected 75bps in cuts this year has been a beacon of hope for the markets.

Market Rate Expectations Adjust

Over the past two months, markets have embarked on a recalibration journey. Initially pricing in 170bps in cuts for 2024, market sentiment shifted to 125bps amid robust economic data. However, recent surges in inflation data have prompted a reevaluation, overshadowing strong labor market and spending figures.

Inflation Data Reducing Rate Cut Predictions

The surges in inflation, particularly in housing and transportation costs, as well as producer prices with contributions from hospital services and energy, have surprised markets. Despite this, the Fed remains steadfast, acknowledging temporary hurdles on the path to reaching the 2% inflation target. Markets are now eyeing the potential for the first rate cut in June.

Treasury and Equities Response

As expectations for fewer rate cuts dampen, Treasuries have faced a sell-off. In contrast, equities continue their upward trajectory. Even though fewer rate cuts typically signal a challenging road ahead for equities due to prolonged higher borrowing costs, the Nasdaq-100 and other indices persist at or near record highs.

Rising Forward Earnings Amidst Optimism

Earnings are on an upward trend as the market anticipates a gentle landing. Nasdaq-100 forward earnings have jumped by 9% since October, adding to the optimism. Recent forecasts from Goldman Sachs and the Fed, upgrading GDP growth outlooks, underscore the strong labor market performance and spending trends.

The earnings momentum generated by expectations of a soft landing appears to outweigh any resistance from reduced rate cut forecasts, fueling the ongoing equities surge.

The above information is for educational and informational purposes only. Neither Nasdaq, Inc. nor its affiliates provide investment advice. Investors are encouraged to conduct their research before making financial decisions. Past performance is not indicative of future outcomes.

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