• S&P 500 posts record high despite upbeat CPI print

• Projections of fewer rate cuts do not scare stocks

• Can this rally extend without a sizable correction?

 

Stocks unhindered by hotter-than-expected inflation report

On Tuesday, the S&P 500 recorded a fresh all-time high, while both the Nasdaq 100 and Dow Jones finished the session in the green despite the stronger-than-expected US CPI print. Specifically, the headline inflation measure came out at 3.2% in annual terms for February against a 3.1% expectation, boosted mainly by the increase in energy prices.

The core consumer index, which excludes food and energy costs, also exceeded expectations by 0.1 percentage points and was measured at 3.8%. In a nutshell, the latest inflation report underscored that the Fed’s campaign against inflation is not over just yet and warned against premature loosening.

This development would normally be negative for stocks as high and sticky inflation might delay the Fed’s interest rate cuts or at least force the central bank to proceed at a slower pace. However, equity markets finished the session higher, appearing immune to downside risks.

What’s behind this remarkable resilience?

The latest rally in equity markets started on the back of speculation for aggressive rate cuts by the Fed in 2024 but has continued even though markets have scaled back their rate cuts projections from six to somewhere between three and four. In a sense, pricing out rate cuts because the economy is performing better-than-expected outweighs the scenario of panic cutting to avoid a recession.

To connect this idea with the market reaction on Tuesday, it is totally different to dial back rate cuts due to solid economic performance than doing so under the fear of high and persistent inflation. Right now, it seems that markets are endorsing the former scenario, appearing confident that the Fed will manage to tame inflation without tipping the economy into a recession.

Strong corporate earnings have also been supportive of this notion as earnings per share for the S&P 500 on an index basis surpassed expectations by more than 6% in the fourth quarter of 2023. Overall, despite the emergence of some weak spots in the US macroeconomic data, it appears that the broader bullish setup for stocks is difficult to reverse in the absence of an exogenous event.

How far can the rally go without a correction?

Considering that all major US equity indices are trading at or very close to their record highs, the vast majority of those who have invested in them are currently in the green. This could easily open the door for a huge wave of profit taking in case any weakness emerges.

Besides that, both the S&P 500 and Nasdaq 100 are currently trading at valuation multiples only seen during the pandemic and the dot-com bubble, which were both followed by a significant stock market rout. Of course, this does not mean that the market is set to undergo a downside correction, but surely the longer it marches north without one the higher is the probability for it to occur.

Levels to watch

From a technical perspective, the US 500 stock index has been recording consecutive all-time highs in 2024, but the advance is looking extremely overbought from a technical perspective.Should the rally resume, the price may initially challenge the round 5,200 level. Further upside attempts could then stall at 5,324, which is the 138.2% Fibonacci extension of its 2022 downtrend.

On the flipside, in case of a pullback, the price may retreat towards the 123.6% fibo of 5,130 ahead of the 5,000 psychological mark.