The S&P 500 is hitting a new all-time high today, with Wall Street benefiting primarily from a significant shift in expectations for Fed policy. Following weaker U.S. labor market data, investors have sharply scaled back bets on an October rate hike. The probability of such a move now stands at around 20%, down from nearly 70% just a week ago.
For equities, this creates a much more favorable backdrop. Reduced expectations of an aggressive near-term tightening cycle are easing pressure on valuations, while slightly lower U.S. Treasury yields are providing an additional tailwind for stocks. Technology stocks are benefiting the most, supported by improving sentiment around interest rates as well as continued enthusiasm surrounding AI.
The market narrative is now starting to shift, however, from the Fed to corporate earnings. Third-quarter earnings season kicks off next week with the major banks. The market consensus calls for S&P 500 earnings to grow by more than 30% year over year, with the technology sector and AI-related investment expected to account for a significant share of that growth.
For now, Wall Street has support coming from two directions. The risk of an October Fed rate hike has fallen sharply, while earnings expectations remain very strong. With the S&P 500 already at a record high, the next leg of the rally will likely depend primarily on corporate earnings and forward guidance. If earnings season delivers on current expectations, the bull market could still have further room to run.
Source: XTB Research
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