Market Minute: Equity Markets and Economic Fundamentals Remain Intact

The stock market is entering its usually favorable holiday season after slightly backing off its all-time highs so far this week. Nvidia (NVDA) earnings were received with a subdued reaction from investors. We could see some unwinding of the current euphoria around A.I. investments, which may present opportunities for the market to further broaden out with other technology groups and cyclical stocks picking up the slack. Bitcoin prices continue to rise and print fresh highs as speculation continues to grow around a favorable outlook toward crypto from the incoming Trump administration. 

The S&P 500 Index has enjoyed strong returns in 2024, up over 24% year to date, and momentum remains firm. Corporate earnings are strong, with many companies outperforming expectations while risk adjusted corporate debt spreads remain at low levels. Favorable corporate tax policy is anticipated to be included in the next administration’s policy agendas, however, there is a big but well-known question mark over the extent to how tariffs will be implemented. With the Fed pursuing an easing strategy despite strong macroeconomic indicators and prosperous markets, the dollar and long duration Treasury yields remain elevated. The Core Personal Consumption Expenditures (PCE) index has consistently hovered around 2.7%, which suggests the economy lacks sufficient investment to meet growing demand. Reducing interest rates while inflation remains somewhat elevated should ease the cost of investment and help the economy grow its way towards the Fed’s long term inflation goal of 2%.