What could pop the market rally?

The animal spirits are back in the game, with major US indices breaking new highs. The S&P 500 and Dow Jones Industrial Average (DJIA) reached a new closing high on Friday, baking in the aura of optimism with Nvidia’s earning results and the possibility of Artificial Intelligence as the next cycle of bull catalysts for businesses and the economy. 

But the truth is that AI is perhaps unlikely to boost the broader economy in the short term. If true, it might seem puzzling for the bull market to continue. After all, the current bullish momentum that began in Oct 2023 was based on a Fed pivot- that interest rate will start to fall as FOMC members warm to easing some of the restrictive monetary policy. 

Yet in recent FOMC press conferences and many of the Fed’s official speeches, there is an intended effort to dial back the market’s expectation of easing policy, yet market participants continued to push plough new funds into the equity market.

So what’s the contributing factor? Some economic indicators point to a robust underlying strength of consumer spending. Home sales are turning around for the better, even in times of sticky high rates. We are seeing a terrific earning season where corporate earnings rise to expectations. About 78% of the companies reported their earnings hit Wall Street’s estimates, which is above the historical average. 

The next factor might be more intriguing. The Fear of Missing Out (FOMO) might be at work. As the AI narratives push the tide up for the broader markets, investors who have been idling on the sidelines find the proper justification to enter the market. “I probably need to put my money to work now!” said the minds of those who have timed the market and missed the upswing. So, there comes a new wave of buying frenzy.

Recently, Charles Schwab’s quarterly survey indicates that active retail investors are soaking in a bullish sentiment that is the highest since the survey’s launch in 2021. This is a spinoff from bearish sentiment during the forth quarter of 2023. That’s another check.

And what could pop the party and pause the melody? If the Fed pushes back the intention of a rate cut beyond the second quarter, it could spell trouble and pressure for the equity market. 

Between then and now, it’s the rock and roll time.

Cheers.