- The S&P 500 reaches new weekly highs at the start of the American session on Wednesday.
- Diminishing expectations for more aggressive rate cuts by the Federal Reserve could weigh on markets.
- Investors' attention will focus on US inflation data this week, with the CPI due on Thursday and the PPI on Friday.
The index S&P 500 extends this week's bullish movement and reaches new weekly highs at 4,768 at the beginning of the American session on Wednesday. At the time of writing, the S&P 500 pulls back slightly from that level and is trading at 4.762, still up 0.20% on the day.
After nine consecutive weeks of gainsfrom near 4,100 points in early November and ending the last week of 2023 above 4,750 points, the S&P 500 made a correction the first week of the yearwith a weekly drop of 1.65%, due to increased geopolitical tensions and amid declining expectations of aggressive rate cuts by the Federal Reserve (Fed).
The feeling improved this Monday and the S&P 500 rose about 1.45% on growing optimism about the US government avoiding a shutdown after House and Senate leaders announced a broad agreement on spending for 1.59 trillion dollars. Additionally, the Federal Reserve Bank of New York's monthly survey showed that Consumers' one-year inflation expectations fell to their lowest level since January 2021standing at 3%.
As of this writing, the CME Group's FedWatch tool shows about 69% chance of first Fed rate cut at March meeting. However, it also shows an 89% chance that rates will be in the 4.0%-4.25% range or lower by the December 2024 meeting. This implies five 0.25% rate cuts from the current 5.25%-5.50% range, which could be good for markets.
Frequently asked questions about the S&P 500
What is the S&P 500?
The S&P 500 is a widely followed stock index that measures the performance of 500 public companies and is considered a broad measure of the U.S. stock market. The influence of each company in the calculation of the index is weighted based on market capitalization. This is calculated by multiplying the number of listed shares of the company by the share price. The S&P 500 Index has achieved impressive returns: $1.00 invested in 1970 would have produced a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.
How are companies chosen to be included in the S&P 500?
Companies are selected by committee, unlike other indices where they are included based on established standards. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be equal to or greater than $12.7 billion. Other criteria are liquidity, domicile, market capitalization, sector, financial viability, listing time, and representation of the sectors of the United States economy. The nine largest companies in the index represent 27.8% of the index's market capitalization.
How can I trade the S&P 500?
There are several ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFDs) to place bets on price direction. In addition, you can buy index funds, mutual funds and exchange-traded funds (ETFs) that track the price of the S&P 500. The most liquid of the ETFs is the London Stock Exchange ETF. The most liquid of the ETFs is State Street Corporation's SPY. The Chicago Mercantile Exchange (CME) offers futures contracts on the index and the Chicago Board of Options (CMOE) offers options, as well as ETFs, inverse ETFs, and leveraged ETFs.
What factors drive the S&P 500?
There are many factors that drive the S&P 500, but primarily it is the aggregate performance of its component companies, revealed in their quarterly and annual earnings reports. US and global macroeconomic data also contribute, influencing investor sentiment, which if positive, drives earnings. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500, as it affects the cost of credit, on which many companies largely depend. Therefore, inflation can be a determining factor, as well as other parameters that influence the decisions of the Federal Reserve.
However, Recent comments from Fed members appear to counter these expectations.. Lorie Logan, president of the Federal Reserve Bank of Dallas, said Saturday that the central bank may have to continue raising its short-term interest rate to prevent the recent decline in long-term bond yields from reigniting inflation. Logan added that “a premature easing of financial conditions could allow demand to rebound” and “If we do not maintain sufficiently restrictive conditions, there is a risk that inflation will rebound, reversing the advancesOn the other hand, Michelle Bowman, Governor of the Federal Reserve, spoke at a conference on Monday and highlighted that “inflation could continue to fall with the monetary policy rate remaining unchanged for some time.” Bowman added that “will remain cautious when considering changes to the Fed's monetary policy rate” and confirmed that “I remain willing to raise the policy rate at a future Fed meeting, should inflation progress stagnate or reverse”.
These recent more hawkish comments could cast doubt on expectations for Fed rate cuts and weigh on stock markets.
For all these reasons, investors' attention will focus this week on US inflation data (USA.). It is expected that the Consumer's price index, which will be published on Thursday, increases to 3.2% year-on-year in December, from 3.1% recorded the previous month. Additionally, core CPI, which excludes volatile food and energy prices, is expected to decline 3.8% year-on-year from 4% previously.
On Friday the Production Price Index US December Headline Inflation (PPI) is expected to rise to 1.3% year-on-year from 0.9% previously, while core PPI declines to 1.9% from 2% previously.
Stronger-than-expected inflation data could show that inflation remains persistent and further dampen expectations of aggressive Fed rate cuts, weighing on investor sentiment.
S&P 500 technical levels
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
