Wall Street extends impressive rally after inflation cooldown

Some of America’s biggest companies are behind the bull run on Wall Street, but can it last?

The bull market run of the S&P 500 index continued today as an inflation reading of 4% effectively sealed the first pause in US interest rate rises since January 2022.

Inflation’s fall from 4.9% as higher energy prices dropped out of annual comparisons, means the Federal Reserve can wait until July to decide whether 5-5.25% will be the peak for rates.

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The S&P 500 rallied another 0.7% at today’s opening bell to 4,373 as futures markets now see tomorrow’s Fed policy decision as a formality followed by a 60% chance of a rate rise in July.

A fear of missing out after the S&P 500 entered bull market territory on Thursday evening meant Wall Street’s leading benchmark was 0.9% higher on the eve of today’s figures.

That took the index to its highest level in over a year at 4,338, up more than 20% since October’s low but still short of the record near to 4,800 at the end of 2021. The rally has taken place in calm conditions as volatility indicators dip to new post Covid levels, fuelled by expectations that the Fed may cut rates later this year as the US economy slows.

Unless a new S&P 500 record is set, analysts at UBS point out that it's still impossible to know whether this is a new bull market or just a bear market rally. With this in mind, the Swiss bank recommends clients continue to exercise caution.

It notes that there’s yet to be the “capitulation moment” that usually comes with a bear market low - a moment of high equity volatility and plunging bond yields as investors flee for safety.

Wall Street’s rally has also been tainted by the fact that it’s being driven by a small number of technology-focused large caps, such as the AI-focused semiconductor giant NVIDIA Corp (NASDAQ:NVDA).

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The company recently raised its outlook far above expectations as businesses race to apply generative AI into products, services and business processes.

Today’s global fund manager survey by Bank of America points out that long positions on big tech have been the most crowded trade in June, a flight that has fuelled a rise of 65% for New York’s FANG index of mega-caps since October.

It also means the S&P 500’s top 10 companies now account for 30% of the overall index.

Source: SharePad as at 13 June 2023

This is a red flag for strategists at Saxo Markets. They said this week: “It shows that competition is going down in the US economy. Second, it shows that the US equity market offers less and less diversification thus inherent risks to a smaller set of risk factors.”

The melt-up scenario has been given further strength by today’s encouraging inflation reading, with the core rate excluding energy and food in line with expectations at 5.3% compared with 5.5% previously. The overall headline rate also beat the 4.1% forecast.