The S&P 500 closed out its best week since April at a record high, driven by strong corporate earnings and fading odds of further Fed rate hikes. A weak jobs report triggered the rally, and the bull-to-bear ratio tracked by Bank of America has now reached its highest level since 2021.
The S&P 500 posted its best week since April and closed at a record high, lifted by strong corporate earnings and a reduced likelihood of further Federal Reserve rate hikes. A weak US employment report set off the move. Bad news from the labor market turned into good news for US stock indices.
Earnings beat by the widest margin since 2008
According to FactSet, 86% of the 440 S&P 500 companies that have reported so far beat forecasts. Corporate profit growth exceeds 50%, the best result since Q2 2021. Wall Street analysts' estimates were exceeded by 29%, a margin not seen since 2008.
Nasdaq leads the rotation back into Big Tech
The strong results are reigniting investor interest in Big Tech. The S&P 500 and the Dow Jones each gained more than 3% over the week.
Nasdaq Composite shares rose more than 5% over the same stretch. Meanwhile, the recent rotation toward shares of companies sensitive to the economy is reversing, further fueling FOMO among investors.
Euphoria leaves stocks exposed to shocks
Bank of America notes the bull-to-bear ratio has reached its highest level since 2021. That is a worrying sign, as any unpleasant surprise could derail the rally. The conflict in the Middle East and upcoming US inflation data for July are the two causes for concern.
Formally, the agreement between Iran and Oman will lead to the reopening of the Strait of Hormuz. However, Tehran is insisting that its demands regarding reparations, the withdrawal of US troops from the region, and the lifting of Western sanctions be met before this can happen. These demands are excessive, which heightens the risk of the conflict escalating and could weigh on the S&P 500.
A CPI surprise could revive rate-hike bets
A modest rise in consumer prices and the core inflation gauge is expected for July on a month-on-month basis. That would effectively rule out any Fed tightening in September. However, if CPI accelerates instead, the odds of a federal funds rate hike would rise again, creating a headwind for the S&P 500.
Source: ActionForex
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