The Detachment Phase: It’s FOMO Before FUD in Stock Markets
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On the US stock exchange, several key indices reached record highs on Friday, as investors remained optimistic despite the lingering risks of persistent inflation and geopolitical tensions. This upbeat sentiment was largely driven by the commencement of the earnings season, particularly the strong performance of major US financial institutions.
The quarterly earnings reports from giants like BlackRock, J.P. Morgan Chase, and Wells Fargo dominated the headlines. BlackRock, for instance, saw its revenue and profits continue to rise, with its assets under management surging by 26% to over $11.5 trillion. This impressive growth propelled BlackRock’s shares to new record highs on Friday.
J.P. Morgan Chase also exceeded expectations, largely benefiting from the high interest rates in the US. CEO Jamie Dimon, however, cautioned about geopolitical risks and highlighted critical issues such as the significant budget deficits in the US. Despite these warnings, the bank’s performance helped push its shares to record levels.
Wells Fargo, on the other hand, reported a lower profit and revenue in the third quarter, including a notable decrease in net interest income. However, the bank’s profit figures were better than anticipated, leading its stock to approach record levels last seen in 2017.
The banking sector’s performance is closely tied to the fluctuations in interest rates, which have been structurally higher than in previous years. This environment has generally favoured the banks, although the sector’s recent price developments suggest it may be poised to catch up with the broader S&P 500 index. This potential alignment could provide additional support to the S&P 500.
On the macroeconomic front, US inflation has proven more persistent than economists had anticipated. Core inflation in September stood at 3.3% on an annual basis, while producer prices remained unchanged on a monthly basis but rose by 2.8% annually. This stubborn core inflation has dampened hopes for accelerated policy rate cuts by the central bank. Instead, it appears that interest rate reductions might occur in smaller increments of 0.25 percentage points, contingent on geopolitical developments and possibly the upcoming US elections.
Despite these inflationary pressures, the stock market remains buoyant, with investors focusing on companies that can maintain high profits by passing on inflation costs. Large tech companies and other major caps are also driving investor enthusiasm with massive stock buyback programs, now exceeding $1 trillion. The confidence in the central bank’s ability to prevent a recession through monetary easing further supports the market’s upward trend.
From a technical perspective, the interest rate market is experiencing fluctuations, particularly evident in the 2-year US Treasury bond prices, which move inversely to interest rates. The chart indicates a medium-term trend of higher peaks and troughs, suggesting that the recent price drop may lead to another higher bottom. This is reinforced by the 50-day moving average exceeding the 200-day moving average, implying a potential attempt at a higher peak in the first two quarters of 2025, which could result in further interest rate reductions.
The S&P 500 index continues to show an upward trend, indicating higher prices ahead. Investors are undeterred by geopolitical risks, high core inflation, rising budget deficits, and record government debts, instead focusing on companies with robust profit margins and the potential for further monetary easing. Additionally, the gold price is also reaching new highs, likely serving as a hedge against inflation and market volatility.
John Stewart
John Stewart was born in Ireland in 1990. A graduate of Oxford University. At the moment he is a journalist of "The Russian Crimes".
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