Investors got some very good news on Tuesday morning: The Labor Department said consumer prices rose just 3.2% in October, down from 3.7% in September, meaning inflation cooled substantially last month. That news solidified hopes that the Federal Reserve has finally reached the end of its aggressive rate-hiking campaign.
Accordingly, the S&P 500 (^GSPC 1.02%) soared during trading hours, and it closed 1.9% higher, marking its best daily performance since April. But investors have reason to believe the benchmark index (and the broader stock market) will continue to climb over the next year.
History says stocks could soar when rate hikes end
CME Group's FedWatch tool uses pricing data from 30-day Federal Funds futures contracts to gauge the probability of upcoming hikes to the federal funds rate. Think of it as a barometer for monetary policy decisions.
Well, the FedWatch tool currently shows a 100% chance that policymakers will leave rates unchanged at the December and January meetings, and a 30% chance that the Federal Reserve will pivot to rate cuts by March.
After that, the implied probability of rate cuts steadily rises throughout 2024, surpassing 50% by July. In other words, the futures market is signaling overwhelming certainty that the Federal Reserve has reached the end of its rate hike cycle, and many investors expect policymakers to start cutting rates by the middle of next year.
That portends significant gains in the S&P 500. The Federal Reserve has steered the economy through six rate hike cycles since 1984, and the S&P 500 returned an average of 17.6% during the 12-month period following the end of those cycles, according to JPMorgan Chase.
So what? The Federal Reserve last raised rates on July 26, but the S&P 500 has slipped 1% since that time. So, if the current rate hike cycle has truly run its course, history says the benchmark index will add about 20% by the end of July 2024. That means many stocks could soar in the coming months.
Wall Street says the S&P 500 is moving toward a new bull market
After three consecutive quarterly declines, S&P 500 earnings are on track to grow in the third quarter, and Wall Street believes that momentum will carry into next year. Consensus estimates call for 2.3% revenue growth and 0.6% earnings growth in 2023. But analysts anticipate an acceleration to 5.5% revenue growth and 11.6% earnings growth in 2024, according to FactSet.
That outlook seems quite plausible amid cooling inflation and potential rate cuts, both of which would stimulate the economy. And projections from Wall Street analysts show the stock market moving toward a record high. The S&P 500 carries a consensus price target of 5,038, implying a 12% upside over the next year. That bottom-up forecast blends the median price target on every stock in the index, combining over 11,000 individual ratings.
If Wall Street is correct in its estimation, the S&P 500 would surpass its previous record high of 4,796 and enter a new bull market sometime during the next 12 months. That would likely lead to even bigger gains in the future because the S&P 500 returned an average of 259% during the last six bull markets, according to Yardeni Research.
What should investors do with this information?
Clearly, there are plenty of reasons to be optimistic about the trajectory of the stock market, but investors should keep their enthusiasm in check. Every situation is unique, no predictive tool is infallible, and not even the smartest Wall Street analysts can predict the future.
To that end, investors should continue to research stocks diligently before buying, and they should add only their highest-conviction ideas to their portfolios.
