The US stocks have been crushing it in the last several months. Normally, that’s relevant to forex, because stocks and currencies typically go in opposite directions. But, right now the situation is a little more complicated, as the US economy stands out with its growth amidst a dour outlook for the world.
Just this Monday, the major indices in the US scored new record highs, despite interest rates still remaining high. Markets took a tumble back in August, as a poor employment reading sparked fears of a recession. But those fears seem to have entirely melted away, as the S&P 500 scored its best year-to-date performance since 1997. The last quarter was the fourth consecutive period of growth, as stocks have been moving higher since the Fed stopped its rate hiking push.
Heights are Quite Lofty
The growth in US indices comes at a crucial point when companies are reporting their earnings for the third quarter. Stock prices have pushed higher in anticipation that those earnings will be strong. Meaning that if companies fail to deliver this unusually strong growth, the US stocks – and risk appetite – could turn around again.
It’s also fairly normal for there to be a correction after a strong period of growth, like what has been seen in US equities since July. A lot has happened in that period. The Fed moved to ease rates, quite dramatically. The yield curve de-inverted. And job creation experienced a slowdown, and then rebound in the final month. All of that seems to be convincing many traders that the good times will keep on rolling, citing strong growth forecasts from US corporate CEOs.
A Tough Bar to Beat
Analysts aren’t so sure about the rosy outlook. Although on average, analysts agree that earnings (and by necessity, the US economy) will keep growing, they have been consistently trimming back those growth forecasts. Three months ago, the expectation was for corporate earrings to grow by about 7.3%. That forecast has been cut back to 4.2%.
Now, the bulls do have some history on their side. In the first quarter, analysts also expected slow earnings growth, and the US economy also underperformed. But corporations reported profits that more than doubled the rate of growth that was expected. That helped push indices higher, buoy risk appetite, and hurt the US dollar – that is, up until the correction in the summer.
A Repeat of the Past or a New Trajectory?
In prior quarters, there had been a lot of concern that the stock market was growing based on a small number of companies, and was at risk of a crash. There was repeated talk of a recession. But that talk has practically gone away (though in the past, the yield curve de-inverted right before a market downturn). Growth in the market has become much broader, with all sectors save energy gaining.
If traders are right about a soft landing, then the comparative growth in the US could be attractive for foreign capital. That means that despite the risk-on attitude, the dollar could remain relatively strong. Particularly if the EU confirms it is in recession and China doesn’t manage to pull its GDP growth rate up to target in the near term.
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