The S&P 500 hits new highs, but what now?

The S&P 500 closes above 5,500 for the first time

Stocks in the US closed up after Federal Reserve chair Jerome Powell said at an event in Sintra, Portugal, that the Fed had made "quite a bit of progress" in bringing inflation back down to the central bank’s target, "while the labour market has remained strong and growth has continued".

"The last [inflation] reading and the one before it to a lesser extent, suggest that we are getting back on the disinflationary path," he said. However, he also said the Fed wants to be "more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy".

In the UK investors are eyeing the election on Thursday amid expectations the Labour party will be voted into power for the first in 14 years.

At this stage, anything other than a clear Labour majority would be more unsettling than seeing them sail through. Maintaining financial stability is set to be the priority for an incoming Labour government, and bond markets are sanguine, with gilt yields significantly lower than they were at the end of May and sentiment driven by the central bank rather than party policies.

We don’t see any real issues for stocks with the incoming government and they are not likely to rock the boat. In a way, Liz Truss has done future governments a favour by showing the necessity of a solid fiscal plan – along with funding.

The pound is still rangebound trading around $1.268, with recent dips showing sensitivity to expectations that the Bank of England will move before the Fed in cutting interest rates.

In corporate news, Vodafone nudged higher after it and Virgin Media O2 said they had agreed to extend and enhance their existing mobile network sharing agreement for more than a decade, forming a new company that will invest £11bn in the project.

The agreement is subject to the planned merger of Vodafone and Three. If that deal goes through then Virgin Media O2 will buy spectrum "establishing three scaled mobile network operators each with better alignment of spectrum holding", the companies said in a statement.

Neobank and fintech group Revolut posted a sharp increase in annual revenues on Tuesday as it continues to work towards obtaining a UK banking licence.

Revolut said revenues surged 95% in 2023 to reach £1.8bn, giving the group a net profit of £344.0m, as it expanded operations to the likes of Brazil and New Zealand and saw its customer base grow 45% to 38.0m. Monthly active users rose nearly 47% and customer balances increased 38% to £18.2bn.

Diageo moved higher after an upgrade to ‘buy’ at Citi. The bank said that with earnings/valuations metrics troughing and destocking headwinds likely to give way to positive earnings momentum in 2025, an inflexion point has likely been reached.

"As such, Diageo’s July FY24E results should act as the clearing event which allows investors to revisit what remains an attractive compounding growth story," Citi said.

Baltic Classifieds also rallied after it reported a 20% jump in full-year EBITDA and a 19% rise in revenue, hailing "strong" performances across its business lines.

Shares in most European industry groups followed suit and were in the green Wednesday morning as the regional Stoxx 600 index advanced 0.5%, led by miners and technology companies.

The spotlight here also continues to be on politics, on the eve of elections in the UK. In France, the benchmark CAC 40 index rose as anti-National Rally parties attempt to prevent Marine Le Pen’s far-right group from achieving an absolute majority in the next round of legislative voting.

US equity futures were steady ahead of a session on Wall Street that will be shortened because of the July 4 holiday. The S&P 500 closed above 5,500 for the first time on Tuesday, its 32nd record this year. The Nasdaq 100 also set an all-time high with its first close above 20,000.

US stocks keep defying doomsayers amid solid corporate earnings, AI mania and expectations that interest rates will drop, adding more than $16 trillion to the S&P 500’s value from a closing low in October 2022

Investors are looking to US initial jobless claims and ADP employment data due Wednesday to gain more clues on the policy outlook. Fed Chair Powell acknowledged the central bank has made “quite a bit of progress” in reducing inflation but emphasized officials need more evidence before lowering interest rates.

Markets are also gearing up for the all-important US payrolls reading due Friday. Economists expect the report to show employers added about 190,000 workers in June and the unemployment rate likely held at 4%.

In Asia, stocks are heading for their longest stretch of gains since May. Japanese equities climbed, with the benchmarks now less than 1% from their record highs.

In China, services activity expanded at the slowest pace in eight months in June, a private gauge showed, a slowdown that may add to worries over the economy’s outlook. Stocks in Hong Kong gained, while those on the mainland fell.

In other markets, oil climbed to near a two-month high, while the Bloomberg Dollar Spot Index and Treasury yields were little changed.

Oil prices edge higher in early morning trading after API numbers overnight showed that the US crude oil inventories fell sharply. ICE Brent moved up and continued to trade above $86 while NYMEX WTI traded near $83 this morning. Uncertainty over a potentially active hurricane season in the US also continued to support the oil market.

Recent data from Mysteel OilChem shows that Chinese state and independent oil refiners may increase crude processing rates to a cumulative capacity of 69.4% in July. The state plants could boost rates by 1.2% MoM, while independent refiners may increase runs by 1.6% MoM this month.

Meanwhile, US natural gas prices declined for a sixth consecutive session yesterday settling at the lowest level since the start of May. Forecasts for cooler weather in the central and eastern parts of the nation weighed on gas consumption prospects.

Finally, the World Gold Council expects gold to remain range-bound over the second half of 2024. It expects falling interest rates in the developed markets to continue supporting gold prices as higher investment flows towards gold as an inflation hedge.

Along with that, gold could also be used by the global investment community to hedge the ongoing geopolitical tensions. However, WGC warned of a possibility of a sizable drop in central bank demand or widespread profit-taking from Asian investors that could impact the overall performance of gold in the latter half of the year.

And that’s it for the midweek update. We’ll be back at the weekend with our week in review.

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