The S&P 500 Index ($SPX) (SPY) is less than 0.5% away from posting a record high, although the Dow Jones Industrials ($DOWI) (DIA) and Nasdaq 100 ($IUXX) (QQQ) both posted record highs Wednesday. Stocks have rallied in recent months from growing speculation that the Federal Reserve will start lowering interest rates by mid-2024. However, the markets may have gotten ahead of themselves by pricing in earlier rate cuts than Fed projections, with swap markets fully pricing in a -25 bp Fed rate cut by the March 19-20 FOMC meeting.
Stocks rallied this year despite China’s struggling economy and a mid-year slump in regional U.S. bank stocks. Also, recession fears and a jump in T-note yields to a 16-year year high in October failed to keep the S&P 500 from rallying 24% this year. The key themes for the direction of stock prices next year will be Fed policy, the outlook for the economy, corporate earnings, Asia and Europe risks, and the November U.S. presidential election.
