Investors have come to the realization that the American Federal Reserve will not be pushing for any further records on the stock market in the near future. This has led them to seek hope from other sources instead of relying solely on the Federal Reserve.
Stock market traders are known for their unique behaviors. For months, they held onto the expectation that the US Federal Reserve would cut interest rates significantly in 2024. Despite inflation in the USA surpassing the target value of 2 percent, the stock market continued to reach new record levels. However, after March’s higher-than-expected inflation and Federal Reserve Chairman Jerome Powell’s clear rejection of any future interest rate cuts, it became evident that interest rates would remain high for a longer period.
As a result, interest rates on US government bonds have risen, causing the US to pay more for its debt service and posing risks to the American housing market. The high mortgage interest rates, exceeding 7 percent for thirty-year loans, are deterring potential buyers and threatening a freeze in the housing market.
Despite these challenges, the disappointment in stock markets has been limited and the price correction has been moderate. The S&P 500, the leading American stock market index, has still seen a growth of over 5 percent since the beginning of the year. Investors are reacting less vehemently compared to when expected interest rate cuts do not materialize, largely due to the stronger-than-expected performance of the American economy.
Björn Eberhardt, Head of the Investment Office at Luzerner Kantonalbank, highlights the positive results of American companies towards the end of 2023 and in the first quarter of 2024. The stock market was also bolstered by the excitement around artificial intelligence, supporting it even as bond yields rose.
Despite the challenges faced by the “Magnificent Seven” tech companies responsible for the stock market’s record highs, there is optimism that the broader foundation of the S&P 500 will support its continued growth. However, concerns remain about the potential slowdown in consumer spending, which has been a crucial driver of the US economy but may be unsustainable in the long term.