S&P 500 Index Reaches All-Time Highs: AI, Rate Cut Hopes Cement The Milestone

The S&P 500 Index, a widely-followed gauge of the U.S. stock market, achieved a fresh all-time high Friday. The index reached a level of 4,826 during intraday trading, surpassing previous peak levels seen over two years ago on Jan. 4, 2021.

Similarly, the SPDR S&P 500 ETF SPY, which closely mirrors the index’s performance, marked a new all-time high of $481 on Dec. 19.

Other ETFs tracking the S&P 500, such as the iShares Core S&P 500 ETF IVV and the Vanguard S&P 500 ETF VOO, also achieved new highs of $483.29 and $441.98, respectively.

The S&P 500 is up 18% since its October 2023 lows and 23% compared to the same day last year.

The broader U.S. stock market is on course to conclude its 11th positive week out of the last 12, highlighting the impressive winter rally.

Chart: S&P 500 Sets New Record Highs

Key Drivers Behind The Surge

Three key dynamics have fueled U.S. stocks over the last quarter:

1. Tech stocks’ impressive performance.
2. Inflation coming down, economy holding up.
3. Markets pricing Fed rate cuts.

Tech Stocks Drive The Rally

Technology stocks have been the driving force behind the surge of the S&P 500 to new all-time highs. The technology sector carries a significant weight of 30% within the S&P 500, and when combined with communication services stocks, their collective weight approaches nearly 40%.

With the Nasdaq 100 Index also reaching record highs and tech stocks outperforming the overall market, the S&P 500 experienced upward pressure.

Remarkably, an equally-weighted index comprising the “Magnificent Seven,” which includes companies like Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, Amazon Inc. AMZN, Meta Platforms Inc. META, NVIDIA Corp. NVDA, and Tesla, Inc. TSLA, has surged by an impressive 110%.

A significant contributing factor to the broader tech rally has been the ascension of artificial intelligence. Within this context, the semiconductor industry has emerged as the standout performer, driven by surging demand for chips.

Inflation Falls, Consumers Show Resilience

The U.S. inflation rate has experienced a significant decline since reaching its peak in June 2022. In December, the annual inflation rate stood at 3.4%, nearly half the increase compared to the previous year. This development has sparked optimism among investors that price pressures are on track to align with the Fed’s 2% target.

The U.S. consumer sector and labor market have displayed remarkable resilience despite elevated interest rates.

Retail sales were 5.6% higher in December 2023 compared to the previous year, setting a 10-month record increase.

Consumer confidence, as measured by the University of Michigan’s index, exceeded expectations in January, reaching levels not seen in over two-and-a-half years.

The job market continues to exhibit robust health, with the U.S. economy adding 216,000 jobs in December 2023, surpassing the expected 170,000, and weekly jobless claims falling to their lowest levels since September 2022.”

Read also: US Consumer Sentiment Tops Estimates In January, Hits Highest Level Since July 2021: Friday’s Economic Digest

Markets Betting On Rate Cuts

In December, the Federal Reserve decided to keep interest rates unchanged for the third consecutive meeting, effectively signaling the end of its policy tightening cycle. Fed Chair Jerome Powell has expressed openness to potential rate cuts in 2024 provided that economic data supports the Fed’s efforts to bring inflation back to its target level.

According to the Federal Reserve’s economic projections, the median expectation is for three rate cuts in 2024.

Market expectations have moved ahead of the Fed’s stance, with investors pricing in more aggressive rate cuts than what the Fed forecasted in December.

The market is betting on a 50-50 chance the Fed will initiate rate cuts in March, and markets are pricing in a total of six rate cuts by December 2023.

Read now: S&P 500, Nasdaq Jointly Hit New All-Time Highs As AI-Driven Stocks Defy Gravity: What’s Driving Markets Friday?

Staff writer Surbhi Jain contributed to this report.

Photo: Shutterstock.