On the one hand, Powell's previous senior Federal Reserve officials have given the market a “vaccine”; on the other hand, corporate profits have replaced monetary policy as the main driving force for fluctuations in US stocks.
On Tuesday, US stocks had a lackluster reaction to Federal Reserve Chairman Powell's hawkish remarks about interest rate prospects. This may have come as a surprise to some market observers.
The chairman of the Federal Reserve said on Tuesday that recent data shows a lack of further progress in inflation, and it may take longer to have confidence in inflation, so it may be appropriate for a high interest rate policy to work for a longer period of time.
Powell announced the “careful handling” of the interest rate cut plan described by ISI analysts at Iver Cole, which should have caused greater market fluctuations.
Investors, however, have remained largely calm. The S&P 500 closed above the intraday low, while the Dow Jones Industrial Average ended six consecutive trading days of decline.
Interest rate sensitive two-year US Treasury yields once topped 5%, reaching their highest level since November, but closed 4 basis points below the intraday high.
Market strategists and fund managers say the market's calm is due to two factors.
First, Powell's previous senior Federal Reserve officials had given the market a “vaccine”, saying they were unwilling to cut interest rates without further signs of slowing inflation.
For example, earlier on Tuesday, Federal Reserve Vice Chairman Philip Jefferson hinted that interest rates might remain at their highest level in more than 20 years until “continuing” inflation shows signs of further slowing.
San Francisco Federal Reserve Chairman Daly and Chicago Federal Reserve Chairman Goulsby and many other officials expressed similar views.
Phil Kosmala, managing director of investment consulting firm Taiber Kosmala & Associates, said:
Powell's remarks today aren't much different from other FOMC members who spoke recently.
Another reason is that, as stock strategist Savita Subramanian said, corporate profits have now replaced monetary policy as the main driving force for fluctuations in US stocks.
According to the latest forecast from the Atlanta Federal Reserve's GDPNow tracking index, US GDP grew 2.9% year-on-year in the first quarter, which is a positive sign for corporate profits.
Analysts believe that from all aspects, the biggest threat facing US stocks is not the Federal Reserve, but the growth of corporate profits.
Rob Haworth, senior investment strategist at Bank of America Asset Management, said investors can no longer rely on the Federal Reserve to cut interest rates to boost the stock market. Conversely, companies may need to meet earnings growth expectations set by Wall Street in order to maintain the rebound.
Profitability remains the key to the market.
Kosmala believes that the biggest profit risk is likely to occur in the fourth quarter. At that time, S&P 500 earnings are expected to increase by 17.7% and revenue by 5.8%.
Editor/Somer