The recent week has seen a slight consolidation in Wall Street following a surge attributed to political developments surrounding former President Donald Trump. Despite this pause, the broader upward trend in the market appears resilient, bolstered by diminishing uncertainties related to the upcoming US elections. The potential for a 'Red Wave' could pave the way for easier deregulation and increased fiscal spending, which are likely to further stimulate market activity. Additionally, the Federal Reserve's commitment to gradual rate cuts, coupled with unexpectedly positive economic conditions, has contributed to a favorable environment for risk-taking as year-end seasonality approaches.
As the market anticipates the release of the US Consumer Price Index (CPI) data, expectations are set for headline inflation to rise to 2.6%, up from 2.4% previously, while core inflation is projected to remain steady at 3.3%. Month-on-month figures for both headline and core CPI are expected to hold at 0.2% and 0.3%, respectively. However, concerns linger regarding the inflationary impacts of Trump's policies, and any readings that exceed expectations could prompt a reassessment of dovish market bets, potentially strengthening the US dollar. Currently, there is a significant market consensus, with an 85% probability of a 25 basis point cut in December, aligning with previous guidance from policymakers.
The recent clearing of US election risks has ignited a risk-on sentiment across Wall Street, reminiscent of the market dynamics observed during Trump's first term. Investors are positioning themselves to capitalize on the anticipated benefits of Trump's "Made in America" agenda, particularly favoring sectors such as financials, technology, energy, and small caps. The S&P 500 has surged to a new record high, supported by a broad rising channel pattern, indicating strong market momentum.
Sentiment indicators suggest that the market is not yet overextended, as evidenced by the AAII bull-bear spread, NAAIM exposure index, and CNN Fear & Greed index. Looking ahead, the S&P 500 may encounter resistance at the 6,168 level, which aligns with the upper channel trendline, while immediate support is identified at 5,873. The index's recent performance, up 5.1%, reflects a robust risk appetite among investors.
The risk-on environment, fueled by the prospects of Trump's second term, has led to broad-based gains across all S&P 500 sectors. The consumer discretionary sector emerged as the standout performer, surging by 12.1%, largely driven by Tesla's remarkable 44% weekly gain and Amazon's 5.7% increase. Financials also demonstrated strong performance, rising by 7.8%, as a less dovish outlook from the Federal Reserve under Trump's policies supports potential net interest margin expansion. Industrials have benefited significantly from Trump's focus on onshoring and anticipated infrastructure spending, with the sector gaining 6.9%. Notably, all stocks within the Magnificent Seven closed higher for the week, with Nvidia reaching a new record high after a 6.8% increase, and Alphabet rising by 6.6%. This broad sector performance underscores the market's optimism and the potential for continued growth as political and economic conditions evolve.