"Soft landing" narrative dominates US stocks Will the S&P 500 index hit 6000 points by the end of the year?

According to the Zhitong Finance and Economics APP, the breadth and coverage of the rising trend in the US stock market have significantly expanded. More individual stocks are following the S&P 500 index into the record-breaking stock market rally, alleviating investors' concerns about the rally in the US stock market being concentrated on a few large tech stocks for most of 2024. With the latest announcement of the higher-than-expected GDP growth rate, along with the recent weeks' initial jobless claims numbers meeting expectations and showing a cooling trend, coupled with the continued decline in inflation, the broadening of the stock market rally highlights global funds' optimistic pricing for the imminent "soft landing" of the US economy. This bullish sentiment is expected to drive the S&P 500 index to touch the epic level of 6000 points before the end of the year.

The benchmark index of the US stock market, the market-cap weighted S&P 500 index, is expected to rise by about 5% by the end of the third quarter on Monday. However, this time, compared to the previous quarters where the "Magnificent 7" (seven major tech giants) with high weights led the index rebound, this time the unexpected 50 basis points rate cut by the Federal Reserve to promote the "soft landing" of the economy has fueled optimism. This has led investors to invest in regional banks, biopharmaceuticals, traditional industrial companies, and other stocks benefiting from economic growth resilience and low interest rates, in addition to the tech giants that have already risen significantly this year.

So far this quarter, over 60% of the constituent stocks in the S&P 500 index have outperformed the index, compared to only about 25% in the first half of the year.

At the same time, the equal-weighted version of the S&P 500 index, which represents an average index stock, has surged by 9% so far this quarter, showing rare outperformance compared to the market-cap weighted S&P 500 index. The equal-weighted index is a benchmark for the market, mainly influenced by the weights of "Magnificent 7" such as NVIDIA (NVDA.US) and Apple (AAPL.US). The outperformance of the equal-weighted S&P 500 index over the weighted version is also a significant sign of market pricing for the "soft landing" of the US economy, as investors expect all sectors to benefit from the Fed's rate cut cycle and soft landing for a comprehensive recovery.

Wall Street investment institutions have expressed that the broadening of the US stock market rally is an encouraging sign for market sentiment. Previously, there were concerns that if the tech giants supporting the US stock market were no longer favored, the US stock market might experience a major reversal - a shift to a rapid decline in a bear market.

This weekend and the start of the new round of US stock earnings season in October will test whether the logic of the "soft landing" of the US economy, which is crucial for the US stock market and even the global stock market, is smooth.

Kevin Gordon, Senior Investment Strategist at Jiaxin Wealth Management, a Wall Street investment institution, stated: "The situation in the second half of this year is almost the opposite of the first half. Even if the contribution of large market-cap stocks such as tech giants is not significant, as long as other constituent stocks perform well overall, I believe this is a very healthy development trend.

Earlier this month, the Federal Reserve initiated its first rate-cutting cycle in four years, cutting rates by 50 basis points more than expected. Federal Reserve Chairman Jerome Powell stated that this move aims to protect the resilience of the U.S. economy, with the purpose of "preventive" rate hikes rather than recession motives. According to LSEG's statistical data, an increasing number of interest rate futures traders expect the Federal Reserve to announce another significant 50 basis point rate cut when it convenes for its rate decision in November - the current probability is around 50%, with expectations of a total rate cut of over 200 basis points by the end of 2025.

In the U.S. stock market, almost every corner benefits from the prospect of low interest rates and expectations of a "soft landing"

Investors generally believe that the most sensitive sectors of the U.S. economy - the industrial sector of the S&P 500 index and the financial component sector - rose by around 10.6% and 10% respectively in the third quarter, far outperforming the market-cap weighted version of the S&P 500 index.

The decline in interest rates has also significantly boosted the stock prices of small and medium-sized companies, which had long been under pressure due to high interest rates. With the boost from the Federal Reserve's rate-cutting cycle, the Russell 2000 index, which is mainly composed of small-cap stocks, has finally seized the opportunity for a rebound, rising nearly 9% this quarter.

As U.S. Treasury yields decline along with interest rates, stocks known as the "fixed-income bond proxies" in the stock market - namely, stocks with strong dividends - have also benefited from the Federal Reserve's rate-cutting cycle, attracting many investors seeking fixed dividend income. The utility and consumer staples sectors of the S&P 500 index have risen by 18% and 8% respectively so far this quarter.

Mark Haak, investment research director at Nationwide, stated that this broadening trend in the market was evident before the Federal Reserve's rate decision on September 17-18. "We had already seen larger sector allocations across industries shortly before, with sector performance levels rising, and then the Federal Reserve took more aggressive rate-cutting measures, ultimately accelerating this trend."

Overall, out of the 11 component sectors of the S&P 500 index, 7 sectors outperformed the weighted version of the index in the third quarter. In contrast, only the technology and communication sectors - including Google parent company Alphabet (GOOGL.US) and Meta Platforms (META.US), the owner of Facebook - outperformed the S&P 500 index in the first half of this year.

The S&P 500 index has risen by over 20% year-to-date, continuously hitting new historical highs, continuing the "bull market rally" that began in 2023.

At the same time, the overall impact of large tech giants has diminished. According to LSEG data flow, the combined weight of the "Magnificent 7" of the S&P 500 index - namely Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla - has slightly decreased from a weight ratio of 34% in mid-July to 31%.

John Lip, Chief Strategist at BakerAvenue Wealth Management, stated: "I think there is a certain degree of stability and pullback in the tech sector." "In any case, we are not in a tech bear market, but you certainly see some classic rotation signs

Market Expectations for "Soft Landing" Logic Continuously Strengthen

Looking ahead to the future of the US stock market, investors may need to see further economic strength data to choose to continue investing in the US stock market. The non-farm payroll data released on October 4th will be a test of the soft landing scenario, with the previous two employment reports falling below expectations. However, more investors undoubtedly hope that the September non-farm payroll will slightly exceed expectations, thereby indicating the continuous strengthening of the logic of a "soft landing" for the US economy.

Market participants also hope to see strong profit data from non-tech companies in the S&P 500 index in the coming months to prove the rationale for their recent stock price surge and to demonstrate the rationale for the "soft landing" logic.

Takinde Dillon, a senior research analyst from LSEG, expects the third-quarter profits of the seven tech giants to grow by about 20%, while the profits of the remaining companies in the S&P 500 index will grow by 2.5%. By 2025, this gap is expected to narrow significantly, with the profits of the remaining components of the index projected to grow by 14% for the full year, while the seven tech giants are expected to grow by 19%.

Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, stated in a recent report that on the grand stage of the US economy achieving a "soft landing," the seven tech giants "should not bear the burden of profit rebound alone. We are in the 'showcase' stage of the soft landing."

With the Push of the "Soft Landing" Logic, Will the S&P 500 Index Directly Aim for 6000 Points this Year?

Tony Ross, Chief Investment Officer of Wilmington Trust, said, "Considering the trend of the US economy, if the interest rates continue to rise at a pace of 25 basis points, we believe that the risk of an economic recession next year may increase." Nevertheless, he still believes that the S&P 500 index will reach an astonishing 6000 points by the end of the year. "As people increasingly recognize the logic of a soft landing for the US economy, funds will continue to flow into the US stock market." In comparison, the S&P 500 index closed at 5738.17 points last Friday.

Ed Yardeni, the founder of the well-known investment institution Yardeni Research and a veteran on Wall Street who has long been bullish on the US stock market, recently stated in an interview that due to the unexpected 50 basis point rate cut by the Federal Reserve last week, initiating a loose monetary policy, the US stock market may experience a "melt-up" trend due to rapid easing—meaning a soaring trend in the stock market that continuously sets new historical highs, eventually resembling the internet bubble of the late 1990s.

This Wall Street veteran predicts that with the Federal Reserve's 50 basis point rate cut initiating a loose monetary policy, there is a high probability that the S&P 500 index will climb above 6000 points by the end of the year.

6000 points—this once jaw-dropping and seemingly aggressive index prediction (at least for the full year of 2023) now aligns with many optimistic strategists on Wall Street as they steadily increase their bullish outlook on the US stock market to keep up with the S&P 500 index's bull market surge of up to 20% this yearBMO Capital Markets, a top global investment institution, has the highest forecast for the S&P 500 index, reaching as high as 6100 points. The second-ranking institution, Evercore ISI, predicts that the S&P 500 index will close at 6000 points by the end of the year, and anticipates that the AI investment boom may continue to drive the U.S. stock market to new highs of 7000 points by 2025.

As the U.S. stock market continues to hit record highs, the technical analysis team from Oppenheimer, a Wall Street investment institution, believes that there are hardly any signs indicating an imminent market peak. The fact that over 60% of stocks listed on the NYSE are trading above their 200-day moving average is seen as an encouraging sign by the institution. This indicates a healthy bullish trend in the market, as it shows that the market rally is not solely driven by a few large tech companies such as Apple, NVIDIA, and Microsoft.

"If the current bull market in the U.S. stock market follows historical average levels, stocks may continue to rise until the end of 2025, with the S&P 500 index reaching around 7000 points by then," Oppenheimer stated in its latest bullish trend research report