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The Unwavering Resilience of Stocks Amid Fading Rate Cut Hopes: A Holistic View of AI Influence

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Despite the looming end to rate cut expectations by the Federal Reserve for March, the S&P 500 index continues to soar to historic heights.

Adam Kobeissi, renowned author of The Kobeissi Letter on X highlighted on Tuesday: β€œEven as three anticipated interest rate reductions were taken off market projections, the S&P 500 edges just 10 points away from an unparalleled peak.”

Why does the chasm persist between interest rates and the equities realm? Let’s delve into the SPDR S&P 500 ETF chart, a fund mirroring the U.S. large-cap index’s performance closely, for answers.

Also Read: Microsoft’s AI Ambitions Propel DeepMind Co-Founder To Leadership Role

The Intersection of Interest Rates and Equity Markets

From 2022 onwards, as the Fed aggressively hiked rates, the index trended downwards β€” interrupted occasionally by brief upwards bounces.

While rate hikes still persisted in 2023, they were less aggressive, and investors sensed the approaching end of the hiking cycle, propelling the index upwards.

Following the Fed’s final hike in July 2023, the index experienced a significant drop of almost 10% between late July and late October as the central bank maintained a hawkish stance in subsequent meetings.

Then came the awaited shift. Indications that the inclination towards rate hikes might be diminishing surfaced in late October, with a decrease in inflation levels cited and dovish comments from Fed Chair Jerome Powell.

Subsequently, the October/November Fed meeting maintained rates for a second consecutive month, marking the beginning of the market’s anticipation of rate cuts in early 2024. At its peak, some economists even projected up to six rate cuts for the year.

However, the market’s upward trajectory shows no signs of abating, despite dashed hopes for a rate cut in the upcoming Wednesday meeting. With inflation proving stubborn in its final percentage points, forecasts now lean towards a maximum of three rate cuts in 2024.

The Unprecedented Influence of AI

Kobeissi attributes the endurance of the market to one key factor: β€œThe strength of AI hype is truly historic,” he asserts.

β€œIn the short term, AI is expected to continue pushing stock prices skyward. However, in the long run, all eyes are on the Fed,” he adds.

β€œThe Fed’s premature β€˜pivot’ speech of December is now under scrutiny. Markets are envisioning three interest rate cuts, if we’re fortunate,” he elaborates.

Earnings season for Q4 2023 unfolded with the S&P 500 index hardly faltering β€” perhaps experiencing minor bumps at most.

Earnings largely exceeded expectations, with 75% of S&P 500 companies delivering better-than-anticipated results, while only 10% issued negative guidance for the upcoming year.

Bank of America analysts at the onset of earnings season emphasized the shift from lower-quality growth, fostered by cheap capital and globalization, to a phase of sustainable efficiency and productivity enhancements driven by automation and AI.

This transition was exemplified by major tech and AI players. As reported by Benzinga, Nvidia Corporation NVDA amassed a staggering $1 trillion in market cap in the initial 67 days of 2024, not merely based on hype but on solid performance through impressive earnings and guidance. However, with a price/earnings ratio of 73x, caution may be warranted regarding the company’s valuation.

Notably, a majority of the Magnificent Seven stocks, including Amazon.com Inc AMZN and Meta Platforms Inc META, reported earnings surpassing expectations.

Tesla Inc TSLA stood as a rare underachiever in the sector, citing declining demand for its electric vehicles.

The Invesco QQQ Trust QQQ, an ETF closely tracking major tech stocks, has surged nearly 13% in 2024, eclipsing the 8.5% gain on the SPY.

Now Read: Nvidia Blazes Trail For 3 Further Phases Of AI Investment Opportunity, Says Analyst

Image created using artificial intelligence with Midjourney.

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