Stock ETFs Keep Rising as Fed Stays Out of the Way

Fed Chairman Powell said little Wednesday to change the bullish narrative powering equities.

sumit
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Senior ETF Analyst
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Reviewed by: etf.com Staff
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Edited by: Ron Day

Federal Reserve Chairman Jerome Powell's words this week suggested little concern about a recent uptick in inflation, and investors appear happy with that point of view and the continuing soft-landing narrative.  

Speaking at his post-FOMC-meeting presser, Powell brushed off this year’s two elevated readings on consumer prices as bumps in the road towards 2% inflation.

The two higher-than-expected PCE reports “haven’t changed the overall story,” Powell noted. He added that while inflation is still too high, it should eventually come down to the Fed’s target.

Powell’s apparent nonchalance in the face of data that would have spooked the Fed and hammered markets in 2022 and 2023 is emblematic of just how much the narrative around inflation and interest has shifted over the past year. The prevailing view is that inflation has been conquered and that rates will only go down from here.

AI, Retreating Inflation and Rallying Stocks

That, combined with exuberance over A.I., has powered one of the strongest, uninterrupted stock market rallies in recent memory. 

The SPDR S&P 500 ETF Trust (SPY) has climbed more than 27% in less than five months without so much as a 2% pullback.

The ETF’s underlying index is now trading at 21 times its expected earnings over the next 12 months, well above its 10-year average price-to-earnings ratio of 18 times.

If history is any guide, the market may grow more expensive still. During the height of the Covid bubble in 2021, the index traded for as much as 23x forward earnings, while it flirted with 25x earnings during the dot-com bubble over two decades ago. 

Risks Lurking

As long as animal spirits run wild, stocks can stay expensive for a long time.

Not to mention, fundamentals could catch up with the market’s ascent. If earnings grow more brisky than expected, then the S&P 500 might not be as expensive as it appears. 

But risks still lurk. If the elevated consumer price readings of January and February aren’t just a bump in the road, but rather an indication that inflation is going to remain stickier than hoped, or worse—accelerate from here—then the optimism that pervades the stock market today might quickly dissipate. 

Whether it’s sparked by inflation or something else, stock market volatility is inevitable. But for now, investors are looking at the bright side of things.

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.