Why Did Stocks Hit New Highs?
The S&P 500 hit a new all-time high last week completing a full rebound from the late-December/early January swoon as better-than-feared tariff news from the new administration powered stocks higher last week. That lack of any tariff news continued a recent streak of good news that’s pushed back on the fears that drove markets lower into the end of 2024 and beginning of 2025.
Consider that the late-December/early January decline in the S&P 500, which was nearly 5% peak to trough, was driven by three main factors. First, the fears of a Fed pause on rate cuts following the hawkish FOMC rate cut in December. Second, Policy fears surrounding immediate tariffs as well as broader debt/ deficit concerns. Finally, AI/tech weakness as markets weren’t getting a consistent dose of AI optimism.
These fears hit their crescendo following the December jobs report, released on Jan. 10, as the S&P 500 pulled back from the highs. However, since the lows on Jan. 13, the S&P 500 has rebounded and that has been driven by several events that pushed back on the aforementioned fears of no Fed rate cuts, disruptive policy and a loss of AI enthusiasm.
First, two weeks ago, Fed Governor Waller surprised markets and expressed openness to additional rate cuts, perhaps in 1H ’25, as he believed inflation was still trending towards 2%. Waller is part of Fed leadership and his opinion pushed back on market fears of a Fed pause. Then, inflation fears eased further following the release of the December CPI on Jan. 15, as it wasn’t as bad as feared and further implied that a pause in rate cuts in 2025 was not a foregone conclusion. Finally, this week Trump took office, but tariff fears weren’t realized and policy from the administration, so far, has not been disruptive to markets. In fact, the Stargate initiative reinvigorated AI enthusiasm and helped fuel last week’s rally to new highs.
So, the fears that drove stocks lower (Fed pause, tariffs/ disruptive policy and AI disappointment) have largely been reversed in the past two-plus weeks and as a result, the S&P 500 is at a new high. But, while stocks are at new highs, it’s very important to realize that none of the risks that hit stocks in late December/early January have been fully eliminated. Instead, fears got a bit ahead of themselves and have been dialed back.
For us, that means this market remains vulnerable to negative news, especially if it comes from three key sources: 1) The Fed (markets have priced in one-to-two cuts this year, but that’s far from a foregone conclusion). 2) Inflation (there are several inflation metrics that have popped recently and if that continues, it’ll further push back on expectations for rate cuts or progrowth policies). 3) Trump ( just because there haven’t been any disruptive trade or economic policies yet doesn’t mean there won’t be and markets are complacent to this risk now).
However, the key to this market remains economic growth. That’s the foundation upon which the bull market is built, so unless these risks materially alter the outlook for growth (so hard landing chances increase materially) or the Fed begins to consider rate hikes (if inflation spikes) then any pullbacks related to these issues should be viewed as entry points in a still-upwardtrending market. From a tactical standpoint, I continue to think that if this market grinds higher, it’ll be via a broadening of the rally with RSP outperforming SPY and cyclical sectors, small caps and mid caps outperforming growth and large caps. That’s based on the idea that if the market does rally towards 6,500, it’s going to be driven by a broadening acceleration of growth and strong earnings gains from non-tech sectors (which have seen earnings growth lag in the recent past).
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