As the Standard P poor’s 500 Index or the S&P 500 surged past the 5,000 mark earlier this year, some investors have been posing where did this leave the 6,000, the 7,000 or heck, even the 10,000 level? In the year ahead, we may find out – and at a marginally more rapid pace than some Wall Street watchers expected. If all goes well economically and in the Federal Reserve’s favour, some investors are arguing stocks could rise an additional 20 per cent by the end of next year. However, some speed bumps could derail the market rally, some of them connected to the actions of Federal Reserve Chairman Jerome Powell.

Investor enthusiasm is high because the economy is strong. Rates remain lofty, but they haven’t blunted the economy’s growth potential. Bullishly minded investors expect the Federal Reserve to ease interest rates later this year, while skeptics believe the bull-market rally is unsustainable.

The direction of interest rates at the US Federal Reserve (ie, tightening or easing monetary policy) sets the mood for the markets. When the Fed raises interest rates, that spells bad news. When it lowers rates, that means easy money and often great gains for many stocks. In the US, the Fed has kept raising interest rates, and every time it does, the markets dips. However, the central bank is on the verge of reversing course. Once they are convinced inflation is steady and then settles back down at a 2 per cent annual rate, the analysts are predicting that the Fed will cut interest rates. But when? That is the question driving the intermediate-term market movement. Many analysts predict the first cut to come in June or July as soon as inflationary pressures show signs of easing.

Also, all they have to do is point to the rapid growth of artificial intelligence (AI) technologies to tell a story of continued market momentum. Analysts such as Ed Yardeni of Yardeni Research are infamously bullish– predicting the S&P 500 to reach 5,400 this year, and rise above 6,000 by 2025. Some analysts have noted that the pace of the recent uptrend could accelerate to speeds never seen before.

Going forward, it will be earnings and economic reports that will drive the markets. Monthly inflation and retail sales data will weigh on the aggregate economy while a slew of earnings reports from Arista Networks, Coca-Cola, Occidental Petroleum and DraftKings, among others, will shine a bright spotlight on certain sectors.

Nevertheless, there remain some potential obstacles on the horizon, including a narrowing breadth of the market, the Fed’s role as a market crutch for some industries like real estate, and market exuberance. Artificially low oil prices have exposed companies’ oversupply problems, but now those prices are on the rise Again, turmoil abroad is affecting us at home with geopolitical dangers, the looming threat of recession, the continued wild swings of oil prices, and the looming political landscape.

And we investors need to be mindful as we traverse this choppy water leading to this next (and perhaps final?) milestone of 6,000 on the S&P 500. It’s a landscape of opportunities and risks in equal measure, with self-awareness being the key to finding advantageous trades in market waters that keep changing their nature, speed and course.

Source: Charley Blaine, Updated: February 11, 2024 9:54 AM EST