Stocks Soar to New Highs Ahead of Fed Decision

U.S. stock valuations have once again reached critical levels as the market treads cautiously ahead of the Federal Reserve's policy decision. The recent rebound in the stock market has pushed valuations to new highs, driven by the resilience of corporate earnings and the prospect of progress in trade agreements. Investors are now closely watching the Federal Reserve's upcoming meeting, where the central bank is widely expected to maintain interest rates unchanged.

Market participants are particularly focused on the remarks of Federal Reserve Chairman Jerome Powell, especially his comments on the economic impact of tariffs. These remarks are expected to provide crucial insights into the central bank's future policy direction. The options market anticipates a 1.1% intraday fluctuation in the S&P 500 index following the Fed's announcement, underscoring the heightened sensitivity of investors to the Fed's decision.

Analysts warn that any hawkish surprises from the Federal Reserve could temporarily pressure cyclical assets. Given the recent inflationary pressures in the U.S. economy, the likelihood of a dovish surprise is considered low. The market will be closely watching how the Federal Reserve uses its balance sheet to stabilize the bond market, as quantitative easing (QE) has historically been a key tool in managing market volatility during periods of uncertainty and economic downturns.

If policymakers hint at the possibility of restarting QE, it could extend the current bullish sentiment, which is particularly important given the strong rebound in the stock market. The probability of a U.S. economic recession has risen to 40%, according to recent data. However, some analysts believe that the Federal Reserve is more likely to maintain a wait-and-see approach during its upcoming meeting, which could dampen dovish expectations.

Investors are also considering other factors that could support the stock market in the short term. These include strong earnings reports, positive trade developments, stock buybacks, and bullish sentiment among retail investors. Some analysts predict that the S&P 500 index could reach 6,000 points in the near term, driven by these positive catalysts. However, they remain cautious about the medium-term outlook, noting that the economy is in the early stages of a slowdown despite the potential peak in negative trade war rhetoric.