What’s driving the Wall Street bull market, and will it last?

Wall Street continues to experience some very positive trading sessions, with the S&P 500 setting historic highs – the index hit the 5,806-point mark after the release of the latest Federal Reserve meeting minutes. This advance was driven by the Fed’s support for a 50-basis-point rate cut, creating an optimistic environment among investors.

In addition to the S&P 500, other major indices, such as the Dow Jones and Nasdaq, have also seen significant gains, reflecting the expectation of more flexible monetary policies.

Despite these gains in the indices, the lack of a clear commitment from the Fed regarding future rate cuts has prompted some caution in the markets. The minutes revealed that while there is consensus on the need for an initial cut, the trajectory of rates will depend on future economic data. This uncertainty has created a moderately optimistic yet cautious atmosphere as investors await more clarity on the future direction of monetary policy.

US CPI for December showed a slight decrease in overall inflation, while the year-over-year CPI growth rate was 2.4%, down 0.1% from the previous month. This development could limit the pace of future rate cuts by the Fed, as while controlled inflation would be favourable for the US economy, persistent core inflation would require a more cautious approach.

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Recent robust employment data also plays a crucial role in the Fed’s strategy. Despite persistent inflation, the strength of the US labour market has been a critical factor in the economy’s resilience and has reduced the likelihood of a short-term recession. This, in turn, has supported Wall Street indices, especially in sensitive economic sectors that have shown growth and recovery.

Still possibility of strong volatility in US stocks

As economic data shows resilience in certain sectors, the financial market remains attentive to signals that could influence the Fed’s future decisions. The combination of controlled inflation and a robust labour market could allow for a more balanced approach by the Fed, which would translate into additional market stability. However, any sign suggesting a change in this dynamic could generate volatility in the coming weeks.

With the growing unrest around the globe, geopolitical tensions have established themselves as the biggest worry among investors, according to data in from broker Saxo. Like last quarter, the US election and interest rates are the second and third biggest worries.

“The sustained concerns about geopolitical tensions align with ongoing global conflicts and economic sanctions, while rising interest rates and inflation remain key risks for global markets,” said Peter Garnry, Chief Investment Strategist at Saxo.

“We also get closer to the US election – now less than a month away – and as such it seems relevant that geopolitical tensions, the election and interest rates are among investors’ top concerns.”

When asked which region will perform the best in Q4, the majority of Saxo clients (49.3%) pointed to North America, which has been the case for the past two quarters as well. Europe is voted – by 47% – as the expected worst region for the final quarter of 2024, which has interestingly been the case throughout the lifetime of the Saxo survey.

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