A last-minute deal to raise the U.S. $31.4 trillion debt ceiling will likely shift Wall Street’s attention to other emerging risks, including further Federal Reserve interest rate hikes and an expected reduction in fiscal spending.
At its May 3 meeting, the Federal Reserve signaled it was open to pausing its most aggressive rate hiking cycle since the early 1980s at its meeting that ends June 13, leading investors to pile back into equities and other riskier assets.
The S&P 500 is up more than 9.4% for the year to date and now trades at nearly 19 times its forward earnings, at the high end of its historical range. Megacap technology and growth stocks, which benefit from lower interest rates, have led the market’s advance.
“There has been a pivot party in equities, which is this idea that Fed will pause and reverse course that has rewarded risk assets,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.
Since May 3, Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard have said that inflation does not appear to be cooling fast enough.
Unexpectedly strong economic data on Friday appeared to bolster their case, with underlying core inflation at 4.7%, up from 4.6% in March and well above the Fed’s 2% inflation goal.