Weekly Market Update: June 26, 2023

The Federal Reserve opted for a pause on interest-rate hikes at its mid-June Federal Open Market Committee (FOMC) meeting. The central bank, aided by May price data that showed a modest decline in inflation, will now have several more weeks to assess the impact that the most restrictive monetary policy course in 40 years has had on demand for goods and services and the overall economy. Perhaps with credit markets tightening, the Fed wants to avoid putting additional near-term pressure on a financial system that witnessed the collapse of three regional banks in March.

But the central bank still struck a hawkish tone with regard to interest-rate policy. The lead bank raised its outlook for the federal funds target rate, with an expectation that it will reach 5.60% later this year. It also should be noted that more than half of the FOMC voting members currently favor at least two more interest-rate hikes this year.

Wall Street is skeptical that the Federal Reserve will still need to raise rates multiple times. Although the consensus expects a quarter-point increase at the July FOMC meeting, bringing the range to 5.25%-5.50%, the market’s odds of another rate hike this year after the antici- pated July increase are very low. Fed Chairman Jerome Powell said that the central bank will be data-driven in its monetary policy decisions, and with all signs suggesting price growth eased further in June, Wall Street thinks the bank is near the end of its tightening cycle. Hence, investors did not shy away from risky assets after the June Fed statement was released.

Meanwhile, Wall Street’s attention will soon turn to second-quarter earnings. This will provide further insight into the health of the economy and how Corporate America is adapting to a slower-growth environment. According to FactSet Research, the estimated second-quarter earnings decline for S&P 500 companies is 6.4%, which would mark the largest setback for the index in three years.

Conclusion: The market had an orderly reaction to the Federal Reserve news. However, with the S&P 500 Index trading north of 18-times earnings, which is above its 10-year average, any news deemed disappointing may trigger some profit taking. In this environment, we continue to recommend investing in high-quality companies. 

Source: ValueLine.com