S&P 500 Forecast: Has the Market Finally Bought What the Fed Was Selling?

• The S&P 500 waded deeper into record territory this week as the country’s largest banks offered an encouraging read on the US economy and corporate earnings outlook
• Falling yields could open the door to further price gains for US equities, gold and silver
• Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities

The S&P 500, Nasdaq 100 and Dow Jones pushed deeper into record territory this week as strong bank earnings fed into an already encouraging fundamental backdrop. Alongside a strong start to earnings season, price action reveals investors may have finally bought into the Fed’s agenda as Treasury yields took a drastic turn lower and the US10Y yield suffered its largest daily decline since late February despite strong economic data.

Months of monetary and fiscal policy support amid a reopening economy has led many investors to expect a white-hot US economy in the months ahead and many official growth forecasts have suggested similar. With the market expecting considerable economic growth in the United States, many market participants voiced concern over a similar rise in inflation that likely sparked concerns the Federal Reserve would taper its policy path sooner than the central bank had planned. In response to rising rate hike expectations, US Treasury yields ticked higher.

All the while, Federal Reserve officials were playing full-court press suggesting, at essentially every opportunity, inflation would be transitory in nature and the Fed would not act before 2023. As it has done countless times in the past, the market denied the Fed’s policy path and pushed yields higher nonetheless – until recently. Whether it was Fed Chairman Jerome Powell’s appearance on 60 Minutes or the seemingly relentless barrage of dovishness from other Fed officials, the market seems to have finally bought what the Fed was selling all along – a lower-for-longer policy plan that would see yields muted.

Consequently, yields have begun to slip as investors buy up Treasurys once more and assets that were once beleaguered by rising yields – gold, silver and mega-cap technology stocks among others – have begun to recover. While the S&P 500 and Dow Jones were relatively unbothered by the rise in yields, concern had begun to mount around broader equity valuations should the US10Y yield reach 2.5% where the S&P 500 earnings yield currently resides.

Suffice it to say, recent price action suggests a palpable change in market expectations which could spark breakouts in assets like gold, silver and the Nasdaq 100. That being said, real economic data continues to come in above expectations and many investors remain dubious inflation will remain transitory. Further still, the recent decline in yields may be mere consolidation ahead of another leg higher.

Peter Hanks

source:dailyfx.com