The Stock Market Surge of 2023 Faces A Test From the Fed, Despite Better Profits

The US stock market is nearing a historic high, and there is a positive outlook for Corporate America's future. However, investors are now closely monitoring the Federal Reserve's actions to see if it will impact the ongoing bull run.

‍

Recent indications of easing inflation pressures set the stage for a potentially bullish period, as the S&P 500 Index sits just 5.4% below its all-time peak. The upcoming central bank meeting holds significant importance, with economists still debating the likelihood of a recession later this year.

‍

The concern lies in the possibility that a strong labor market might prompt policymakers to signal further tightening measures beyond the expected rate hike this week. This could jeopardize Wall Street's profit forecasts, particularly for the technology stocks that have been driving this year's market progress.

‍

Ed Clissold, Chief US Strategist at Ned Davis Research, warns that if the Federal Reserve is compelled to accelerate its tightening cycle, it could result in a policy mistake with severe consequences.

‍

Investors are preparing for a significant week on two fronts. A substantial number of companies in the S&P 500, accounting for approximately 40% of its market capitalization, are set to report earnings, including major players such as Microsoft Corp., Meta Platforms Inc., and Google's parent company, Alphabet Inc.

‍

Furthermore, the Federal Reserve's expected rate hike to a 22-year high and Chair Jerome Powell's press conference on Wednesday could prove decisive. The central bank's potential inclination towards an additional rate increase risks impeding economic growth and unsettling market sentiment.

‍

Amidst differing views on the market's trajectory, some investors remain defensive, anticipating a potential recession. However, signs of strength in the housing sector are countering bearish arguments, with US homebuilder sentiment reaching a 13-month high.

‍

The upcoming GDP report is expected to show growth at a 1.8% annual rate last quarter, and investors will closely monitor indicators such as the employment cost index and the personal-consumption expenditures price index, which will influence the Fed's decisions in the future.

‍

While the energy sector's profits have weighed down S&P 500 firms for three consecutive quarters, the earnings outlook appears to be improving when excluding this sector. Bloomberg Intelligence data suggests that profit growth, excluding energy, is expected to rebound in the latter half of the year.

‍

Gina Martin Adams, Chief Equity Strategist at BI, cautions that using the economy as a forecasting tool for the stock market can be uncertain and challenging. The earnings outlook has improved significantly compared to last year's market expectations.

‍

In conclusion, the stock market's path is currently influenced by various factors, including the Federal Reserve's actions, earnings reports, and economic indicators. Investors remain cautious, and the overall sentiment is mixed as the market awaits further developments.

‍