Despite concerns about various economic factors such as inflation, Federal Reserve hawkishness, and China’s economic slowdown, the S&P 500 is approaching its 2023 peak, less than 2% away. This resilience is impressive, especially considering recent high benchmark bond yields, typically a challenge for the market.
One reason for the market’s ability to withstand rising bond yields is the ICE BofAML MOVE index, which measures expected volatility in Treasurys. This index has dropped to its lowest point in 18 months, signaling reduced market turbulence, which has also been reflected in the CBOE VIX, a gauge of S&P 500 volatility.
There are four key reasons why bullish sentiment remains strong:
- Technical Indicators: The S&P 500 has moved above its 50-day moving average, providing support. Additionally, the 14-day relative strength index is trending up but remains well below overbought levels.
- Market Reaction to Central Banks: The equity rally following the European Central Bank’s dovish stance suggests that when the Federal Reserve signals it’s done tightening, it could benefit equities similarly, as history has shown.
- Company Profits: Earnings forecasts for S&P 500 companies have improved in recent months, with third-quarter earnings per share expected to rise by 0.5%. If realized, this would mark the first year-over-year earnings growth reported by the index since Q3 2022.
- Financial Strength: A significant factor for a sustained bull run is having ample financial resources. Money market funds currently hold a record $5.625 trillion, indicating investors’ cash reserves. As these funds potentially flow into the market, they could fuel a year-end rally.
While market calmness may raise concerns of complacency, these four factors suggest a positive outlook for bulls. Investors are watching technical indicators, central bank actions, earnings growth, and available financial resources to support their optimism.