The S&P 500 is enjoying the rally fueled by huge AI optimism, and yesterday’s CPI report added more fuel to the fire. Even the hawkish FOMC dot plot could not stop the advance. Yesterday’s CPI announced a lower-than-expected figure, indicating that the disinflation process is beginning to transition to the whole economy. However, the FOMC economic forecasts were hawkish, with an upward revision to inflation, above-average GDP for the entire horizon, and most importantly, only one rate cut projected for 2024. On top of that, the longer-run federal funds rate was revised upward, meaning the Fed is beginning to acknowledge that the neutral rate is moving up, despite Powell’s speech.
(S&P 500 Equal Weight vs S&P 500)
So, is the S&P 500 getting too high? It is hard to say. Sure, valuations are getting high, and AI optimism may be overextended, but prices are still not too far from the base. The key metric to watch might be the S&P 500 Equal Weight Index. The recent run has been driven mostly by big tech. The difference between the large-cap tech companies and mid-cap/small-cap companies is increasing. This divergence can be seen clearly in the chart above. For the S&P 500 to advance to new highs, it needs more support from stocks other than the giants. If not, the bullish sentiment will start to suffer. Although the hawkish FOMC forecast may sour the mood, the low inflation data might support further advances.
(ES500 Daily Chart)
The break of 5345 was important for the ES 500 Index, and after a couple of days of staying above it, it finally started to move upward. 5570- 5600 zone might be the next target for upward moves, but to get above it, the S&P 500 needs more fuel from sectors other than the tech giants. So far, the upward trend is still ongoing, and unless it is broken, the optimism might continue.
