"After the 'Super Week', the conclusion of the US stock market: Risk On!"

The week ended on a perfect note for the global market, with concerns eased over the unexpected shift in the Bank of Japan's stance and an increased possibility of the "golden girl" scenario, leading to a shift in the US stock market towards a "Risk On" mode.

In the overnight market, the Nasdaq rose nearly 2%, marking its largest gain in two months, while the Dow Jones and S&P 500 both recorded three consecutive weekly gains.

On Wednesday, the Dow Jones recorded a 13-day winning streak, setting a new record since January 1987. The S&P 500 recovered from last year's decline and has risen over 19% so far this year.

The reason behind the continuous surge in the US stock market is that various economic data indicate a higher possibility of a "soft landing" for the US economy, and corporate earnings have also exceeded expectations.

Furthermore, concerns over the unexpected shift in the Bank of Japan's stance have been alleviated, as it turned out to be less hawkish than previously expected. These three positive factors have ignited market enthusiasm.

Three positive factors fueling market enthusiasm

1. Increased possibility of a "soft landing"

The latest policy meeting of the Federal Reserve and new economic data all point to a slowdown in inflation and the avoidance of a recession.

The latest report released on Friday shows that price and wage pressures have eased. According to the US Department of Commerce, the preferred inflation indicator favored by the Federal Reserve, the PCE Price Index, and the core PCE Price Index both showed a slowdown in growth in June. The PCE Price Index recorded its lowest year-on-year growth rate since March 2021, and the core PCE Price Index grew at a slower-than-expected rate of 4.1%, the lowest since September 2021. The labor cost index for the second quarter increased by only 1%, the lowest growth rate in two years.

At the same time, despite the active interest rate hikes in the United States, the economy has remained resilient, fueling speculation that the Federal Reserve will be able to avoid an economic recession.

During this earnings season, fewer US technology companies have discussed economic recession, indicating that companies are becoming increasingly optimistic about the "soft landing" of the economy. According to Bloomberg's analysis, nearly half of the Nasdaq 100 companies have already released their earnings reports, and company executives have used fewer terms such as "headwinds," "inflation," and "recession" in their conversations with investors. This is in stark contrast to last year when such concerns led to a sharp decline in the US stock market.

In addition, the Federal Reserve raised interest rates by 25 basis points this week, and Fed Chair Powell stated in the subsequent press conference that the Federal Reserve no longer predicts a recession in the United States. Due to the stronger-than-expected resilience of the US economy, investors have become more optimistic about the possibility of a soft landing, leading to a rapid rebound in the market this year. Matt Bush, Director of Macro and Investment Research at Guggenheim, stated:

The market is indeed starting to price in the idea of a soft landing, which just a few months ago seemed so distant.

2. Better-than-expected corporate earnings

There is also positive news regarding corporate earnings, with many companies surpassing analysts' consensus expectations.

According to FactSet data, approximately half of the companies in the S&P 500 index have reported their second-quarter earnings, and 80% of these companies have exceeded analysts' consensus expectations, which is higher than the five-year average of 77%.

Shares of Meta and Alphabet both rose on Friday, with a nearly 10% increase for the week. Both companies have reported accelerated sales growth. These large technology stocks, which carry significant weight in the S&P 500 index, have boosted the communication services sector, which was the best-performing sector in the market on Friday. Intel has returned to profitability due to the recovery in the personal computer market, with its stock price rising by 6.6% on Friday.

Erik Ristuben, Chief Investment Strategist at Russell Investments, said:

In fact, the earnings situation is not as bad as people feared, which has provided support to the market.

3. Bank of Japan's adjustment not as drastic

In the "sell the rumor, buy the news" event, US stocks reversed their decline on Thursday when market anxiety was high ahead of the Bank of Japan's decision.

During the monetary policy meeting on Friday, the Bank of Japan kept the key short-term interest rate unchanged at -0.1%, but made some adjustments to its yield curve control (YCC) policy. The target range for the 10-year Japanese government bond yield was maintained at ±0.5%, but the wording changed. The Bank of Japan stated that the upper and lower limits are only for reference and that it will exercise more flexible control.

Previously, due to speculation that Japan's ultra-loose monetary policy would undergo drastic changes, the yield on 10-year Japanese government bonds surged to its highest level since 2014.

Regarding this, Dennis DeBusschere, Founder of 22V Research, believes:

As Japan is one of the largest buyers of US bonds, any significant adjustments to Japan's monetary policy will have an impact on the global bond market. If Japan's yields become more attractive, there may be a sell-off of US Treasury bonds, **but the actual changes in YCC are not as drastic as people feared.