The stock market is on the brink of a significant melt-up, fueled by a combination of key factors that are creating a more favorable environment for investors.
According to Yardeni Research, four elements could contribute to this surge, including the much-anticipated Federal Reserve’s pivot on interest rates, the potential return of Donald Trump, a recent Supreme Court ruling, and robust corporate earnings.
1) ‘Fed Pivot:’ The Federal Reserve's shift in monetary policy is at the forefront of this anticipated stock market upsurge, according to analysts. With inflation showing signs of moderation and economic growth remaining solid, the Fed is expected to begin cutting the federal funds rate. Recent data, including last week's CPI and the latest retail sales report, confirm this trend.
"Fed Chair Jerome Powell's dovish comments yesterday sealed the deal," notes analysts, highlighting the market's expectation of a 25 basis points rate cut in September, with a total of five such cuts anticipated over the next year.
This move is expected to lower borrowing costs and boost market liquidity, driving up stock prices.
2) ‘Trump 2.0:’ The recent developments in the political landscape also play a crucial role in the market's outlook.
Betting markets are now showing 2:1 odds in favor of former President Donald Trump winning the upcoming election, up from a coin-flip just two months ago. Investors are focusing on Trump's potential to reintroduce low-tax policies and deregulation.
"For now, investors may be focusing on Trump's low tax-rates policy rather than his high tariff-rates policy," analysts point out.
3) ‘SCOTUS Chevron (NYSE:CVX) Ruling:’ The Supreme Court's recent decision to limit the Chevron (CVX) deference, which gave regulatory agencies significant power to interpret laws, is another critical factor.
According to analysts, this ruling is expected to result in a more business-friendly regulatory environment.
"Expectations for a more business-friendly regulatory regime are the boon private markets have been waiting for,” the market research firm said.
This could lead to increased mergers and acquisitions, with companies like Evercore and Lazard already seeing significant stock price gains in anticipation of heightened M&A activity.
4) ‘Earnings:’ Lastly, the anticipated market melt-up could receive an additional boost if the ongoing Q2 earnings season reveals a robust performance from corporate America.
The S&P 500 has reached a new record high, with the index climbing 0.9% week-to-date as of July 17. The broader market is also benefiting, with the S&P 400 and S&P 600 up 3.1% and 5.0%, respectively.
Analysts point out that the Financials sector is leading the charge, seeing notable gains on the back of better-than-expected second-quarter earnings.
"The stock market rally is finally broadening as investors anticipate that lower interest rates will benefit many of the bull market's laggards."
The market research firm has predicted a melt-up if the Fed began lowering interest rates, even if such a move wasn't strictly necessary. While it wasn’t advocating for this scenario, the team is now concerned about when it could turn into a meltdown.
"For now, it's still a happy-go-lucky bull market until further notice."