17.10.202414:24 Forex Analysis & Reviews: S&P 500 amazes investors with its rally

As it commonly happens, elevated expectations lead to disappointment, while lowered ones lead to success. At the beginning of 2023, Wall Street experts predicted that the S&P 500 would rise to 4,050 by the end of the year, which turned out to be 15% lower than reality. At the start of 2024, the consensus estimate was 4,867. By mid-autumn, the broad stock index is trading 17% higher. Specialists underestimated the potential for a stock market rally, allowing it to shine.

A stronger-than-expected US economy, impressive corporate earnings, and the AI technology boom have enabled the S&P 500 to set 46 record highs in 2024. Since the beginning of the year, the rally has been the fastest since 1997, when the dot-com bubble was inflating. Optimism is through the roof, banks are upgrading forecasts, and corporate executives are more zealous bulls than Bloomberg experts. They predict corporate earnings growth of 16% in the third quarter, while analysts expect 4.2%.

S&P 500 corporate earnings dynamics

According to a survey by Bank of America, global investors have significantly pumped up their stock holdings in portfolios and reduced the share of bonds and cash. The bank notes the biggest surge in optimism since June 2020 in light of a sharp rate cut at the start of the Federal Reserve's monetary easing cycle and massive stimulus from China. The exaggerated bullish sentiment could lead to a downward correction.

Morgan Stanley believes that the trigger for a pullback in the S&P 500 will be the further strengthening of the US dollar. It is being bought as a safe-haven currency amid rising geopolitical risks in the Middle East, increased volatility ahead of the elections, and revised expectations regarding the fate of the federal funds rate. Previously, derivatives predicted a 75-basis-point rate cut by the end of 2024, but now they are estimating a 50-basis-point rate cut.

S&P 500 and US dollar dynamics

A stronger dollar is bad for corporate earnings, as a significant portion of earnings is generated outside the US. Converting foreign currency into dollars worsens final results. On the other hand, a strong USD index reflects American exceptionalism. The US economy is outperforming all others, which is great news for the S&P 500.

No wonder, UBS has raised its forecast for the broad stock index from 5,600 to 5,850 by the end of 2024 and from 6,000 to 6,400 by the end of 2025. Goldman Sachs sees the 6,000 mark being reached by the S&P 500 this year, while BMO is the most bullish among the major banks, setting a target of 6,100 by the end of 2024.

Technically, the S&P 500's daily chart shows a strong upward trend. Investors rush to buy the index during pullbacks. The bulls will continue to control the market until the broad index drops to a fair value of 5,700. It is a good idea to hold long positions opened above 5,740 and periodically add more long trades. Interestingly, the first of the two previously set targets at 5,800 and 6,000 has already been hit.