The market value of US stocks surpasses $50 trillion to reach a new high, caution needed for future trends: focus on elections, interest rate cuts, and technology stocks

According to the Zhitong Finance and Economics APP, despite facing controversies surrounding the U.S. presidential election, changes in Federal Reserve policy, and concerns about economic recession, the U.S. stock market continues to show strong growth momentum, with investors remaining optimistic about the market's rise in October. Following the rise in the third quarter, the S&P 500 Index's market capitalization has surpassed the $50 trillion mark for the first time, making it the best start since 1997. However, the performance of tech stocks has been mediocre, in stark contrast to the significant rise in equal-weighted indices, indicating broad market participation. Despite economic risks, the market generally expects economic growth to remain stable.

Data shows that the S&P 500 Index has just ended its third consecutive week of gains, rising by 5.1% in the third quarter overall, marking the best start since 1997, with its market capitalization surpassing the $50 trillion mark for the first time.

Figure 1

It is worth noting that this increase did not receive much help from large tech companies, as the Nasdaq 100 Index, which is dominated by tech stocks, only rose by 1.7% this quarter, while the equal-weighted version of the S&P 500 Index rose by nearly 9%. This indicates that the recent uptrend is broad-based, with the main driver being market expectations of a Fed rate cut to achieve a soft landing for the economy.

Stable Economic Growth Expectations, But Market Concerns Persist

Nevertheless, the market remains cautious about whether the upward trend can continue into next month and the end of the year. Currently, few traders and investors are willing to take hedging measures. Mary Ann Bartels, Chief Investment Strategist at Sanctuary Wealth, expressed optimism about the stock market and expects the S&P 500 Index to reach 6,000 points by the end of 2024, representing an increase of about 4.6% from last Friday's closing price. She believes that although the rally in chip stocks has paused, large tech companies and semiconductor companies will lead the market higher in the fourth quarter.

A top brokerage report from Goldman Sachs shows that her forecast is supported by hedge fund trading, with hedge fund trading indicating that the number of people betting on the rise of information technology stocks is nearly three times that of those betting on the decline of information technology stocks.

Of course, there are also some concerns in the market. The Federal Reserve is trying to achieve a soft landing for the economy after rapid inflation and a sharp rise in interest rates, but this effort has had little success. In addition, the New York Fed stated that the likelihood of an economic recession in the next 12 months remains high.

Bartels pointed out that the employment report on Friday is crucial, as it will provide more clues about the economy and influence the Fed's rate cut decision at the next meeting. Nevertheless, the market generally expects economic growth to remain stable. The Atlanta Federal Reserve Bank's GDPNow model shows that the real GDP annual rate for the third quarter is expected to climb to 3.1%, higher than the 3% in the second quarter Option positions also show a similar optimistic sentiment. The five-day moving average of the put/call ratio is close to 0.51, the lowest level since July 2023, with the ratio rising as bearish bets increase.

Figure 2

Since concerns about economic growth led to the stock market experiencing its most severe sell-off of the year in the first week of September, this year's stock market rebound has surprised skeptics. Furthermore, NVIDIA Corporation (NVDA.US) has not been much help to the stock market. NVIDIA is a typical representative of the artificial intelligence boom that has driven the stock market bull run for the past two years, but has stalled this summer.

What has saved investors is that the rally has expanded beyond mega-cap tech stocks. According to data compiled by Bloomberg, equal-weighted indices like the S&P 500 are expected to outperform conventional market cap-weighted benchmark indices in the third quarter, reaching a new high since the last three months of 2022.

Figure 3

Future Market Outlook: Cautiously Optimistic, Focus on Key Events

With the S&P 500 hitting record highs and a lack of strong catalysts such as key economic data or earnings reports, short-term option prices for the coming weeks appear elevated. However, contracts looking further ahead reflect a series of events that could trigger market turbulence.

Over the next six weeks, investors will focus on two crucial employment reports, a series of earnings from some of the largest U.S. companies, the U.S. presidential election on November 5, and the next interest rate decision by the Federal Reserve on November 7.

Traders have differing views on the magnitude of the next rate cut, with the derivatives market increasingly seeing a higher probability of a half-point rate cut. Both approaches carry risks.

Despite these uncertainties, some analysts still believe that the stock market has upside potential, especially in tech and semiconductor stocks.

Rich Ross, technical analysis head at Evercore ISI, is optimistic about semiconductor stocks in the fourth quarter, especially after the largest U.S. computer memory chip maker, Micron Technology Inc. (MU.US), announced unexpectedly strong sales forecasts. He expects the $25.3 billion VanEck Semiconductor Exchange-Traded Fund to rise another 20% by year-end after a 45% increase in the first three quarters, including chip leaders like NVIDIA, Micron, and Broadcom Inc. (AVGO.US) Richard Bernstein Advisors' Deputy Chief Investment Officer Dan Suzuki said, "The rise in tech stocks should be beneficial to the market's upward momentum." The company is increasing its investments in small-cap stocks, as well as industrial, materials, and energy companies. "But if this comes at the expense of sacrificing investment breadth, I wouldn't consider it a healthy signal."

Tony Roth, Chief Investment Officer of Wilmington Trust, said, "Considering the economic trends, if the rate hike continues at a pace of 25 basis points, we believe the risk of an economic recession next year will increase." Nevertheless, he still believes that the S&P 500 Index will reach 6,000 points by the end of the year. "As expectations for an economic soft landing increase, the stock market has no other place to go."