Wall Street traders bet that the Federal Reserve will be able to pull off a soft landing, spurring a rebound in riskier areas of the market and sending U.S. stocks to fresh record highs.

The S&P 500 rose 1.7% on Thursday, hitting its 39th record high since 2024 and extending its gains this year to around 20%. Technology stocks led the gains, while defensive stocks underperformed. The Nasdaq 100 rose 2.6% and the small-cap Russell 2000 rose 2.1%. The S&P 500 broke through 5,700 points and the Dow Jones Industrial Average broke through 42,000 points, both record highs. The VIX, Wall Street's favorite volatility index, fell to around 16.

Despite the relatively calm mood, traders are bracing for a quarterly event known as triple witching, when derivatives contracts tied to stock and index options and futures expire, which could amplify market moves. About $5.1 trillion in contracts are set to expire on Friday, according to estimates by Asym 500. The options expiration comes as benchmark indexes are rebalancing.

The Federal Reserve’s bold move to start cutting interest rates and its determination not to fall behind the curve has rekindled hopes that the central bank can avoid a recession. Data on Thursday showed that applications for unemployment benefits fell to the lowest level since May, suggesting the labor market remains healthy despite a slowdown in hiring.

“Despite some volatility following the Fed’s rate cut, the S&P 500’s bullish trend remains intact,” said Fawad Razaqzada of City Index and Forex.com. “The Fed’s decision to cut rates by 50 basis points was largely welcomed by investors. The move was seen as a bold but necessary step that would ease economic concerns without sending panic signals reminiscent of the 2008 financial crisis.”

Keith Lerner of Truist Advisory Services Inc. said that if a recession is avoided, stocks tend to respond positively to lower policy rates next year. He noted that the Fed has had six rate-cutting cycles since 1989, and in four of the six times, stocks rose a year later.

“Historically, equity markets have performed well in periods when the Fed has cut rates and the U.S. economy has not fallen into recession. We expect this time to be no different,” said Solita Marcelli of UBS Global Wealth Management. “Our base case remains that the S&P 500 will reach 5,900 by year-end and rise to 6,200 by June 2025.”

Marcelli said she believes stock gains will extend and growth stocks, especially technology stocks, still have the potential to rise further. "Within the technology sector, we expect artificial intelligence to be the main driver of stock market returns in the next few years and recommend strategically investing in this theme. In the coming months, volatility in the technology sector may rise due to cyclical risks and geopolitical risks. Investors can take advantage of this volatility to build long-term investments in artificial intelligence at more favorable prices."

Strategist who predicted a rebound last year sees S&P 500 soaring to 6,100 by year end

BMO Capital Markets believes that the stock market's surge this year has sent the S&P 500 soaring 20%, but the surge is far from over. Brian Belski, the company's chief investment strategist, raised his 2024 year-end forecast for the S&P 500 from 5,600 to 6,100, the highest target among Wall Street targets tracked by Bloomberg. Belski believes that the S&P 500 will rise another 9% by the end of 2024.

Belsky, one of the few prognosticators who correctly called last year’s stock market rebound, raised his outlook for stocks for the second time this year. Strategists have an average year-end price target of about 5,523, according to data compiled by Bloomberg. “We continue to be surprised by the strength of the market’s gains and have again decided that more than a gradual correction is in order,” he wrote in a note to clients Thursday. He cited the Federal Reserve’s shift toward easing as well as increased market participation that is not limited to the so-called “Big 7” stocks that have been the main drivers of the S&P 500 until recently as reasons for his bullish outlook.

According to BMO data, the S&P 500 has only risen between 15% and 20% in the first nine months of the year eight times since 1950, and the average return in the fourth quarter of those years was about 6%. That's about 50% higher than the average return in the fourth quarter of previous years.

Wall Street equity strategists have been relatively quiet over the summer as U.S. stocks surged in the first half of the year and Goldman Sachs, UBS and Citigroup raised their S&P 500 forecasts. BMO became the latest firm to raise its U.S. stock forecast after Deutsche Bank strategists raised their U.S. stock forecasts last week. After Belsky's latest forecast, Evercore ISI strategist Julian Emanuel raised his S&P 500 forecast to 6,000, the second highest.

BMO expects a soft landing for the U.S. economy and said the current market backdrop resembles the mid-1990s, when U.S. stocks were able to maintain high price-to-earnings multiples for several years during the dot-com bubble. However, the firm stuck with its 2024 S&P 500 earnings per share forecast of $250, indicating that "fundamental and macro fundamentals remain largely unchanged."

The article is forwarded from: Jinshi Data