Will the US stock market continue to rise? The most popular trading themes of 2024 reappear on the scene

One of the biggest and most important trading themes at the beginning of 2024, which faded from investors' and traders' views a month ago, has quickly returned to their minds.

According to the Financial Channel APP, market participants had expected the Federal Reserve to cut interest rates by as much as six to seven times by 25 basis points each at the beginning of this year. However, as time passed, these hopes gradually faded. After the unexpectedly strong May employment report (adding 272,000 jobs), economists and traders began to doubt whether the Federal Reserve would cut interest rates this year.

Earlier this month, the May employment report was revised downward, while the April non-farm payroll growth was also revised downward, prompting a rethink of whether the highest interest rates in 23 years are finally starting to impact the labor market. Other data released last week showed that inflation eased according to the June Consumer Price Index, while the Consumer Confidence Index for July fell to an eight-month low.

According to CME's FedWatch tool, as of Tuesday, federal funds futures traders expect a more than 50% chance that the Federal Reserve will cut interest rates by three times by 25 basis points each by December, bringing the main policy rate target from the current 5.25%-5.5% to 4.5%-4.75%.

These traders expect a total of five to six rate cuts by June next year, bringing the federal funds rate target to 4%-4.25% or 3.75%-4%. In other words, they have returned to the multiple rate cut expectations from January, just with a different timing now.

The performance of the US stock market last week demonstrated how rate cut expectations triggered a broader rebound. Last Thursday, the June Consumer Price Index report came in below expectations, prompting traders to turn to small-cap stocks and other market segments expected to benefit from rate cuts, with the 10-year Treasury yield closing at its lowest level since March. The next day, federal funds futures began to reflect a more than 50% chance of two or more rate cuts by the end of the year.

Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, mentioned that the stock market last week "significantly" rotated towards cyclical stocks and stocks that have lagged since the beginning of the year. "After such a concentrated market, it is very important for investors to rebalance and maintain appropriate allocations," Marcelli wrote in a report released on Tuesday.

Marcelli stated in the report, "While we are not most bullish on small-cap stocks, they are historically at low levels in terms of relative value, and if rates fall and economic growth remains strong, they may rebound quickly."

On Tuesday, the US stock market closed higher, with the Dow Jones Industrial Average rising 1.9% or 742.76 points, mainly influenced by flat June retail sales data, maintaining expectations for a rate cut in September. Meanwhile, the 2-year and 10-year US Treasury yields closed at their lowest levels since February 7 and March 12, respectively