Why Higher-For-Longer Interest Rates Have Not Mattered
A soft CPI number saved the market Wednesday, but Jerome Powell's hawkish tone can’t be ignored.
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The most surprising aspect of the market action over the past year has been the ability of the major indexes to trend steadily higher, although interest-rate cuts have been consistently delayed. At the start of the year, the market anticipated that there would be five or more rate cuts in 2024. At the Fed meeting on Wednesday, it was indicated that one quarter-point cut is likely.
Higher interest rates for longer is supposed to be a market negative but the S&P 500 and Nasdaq 100 QQQ hit new all-time highs again on Wednesday. The indexes don’t accurately reflect what is going on with the average stock, but the big-cap technology names that have propelled them have been immune to Fed hawkishness.
Big-cap technology names such as Apple AAPL and Microsoft MSFT don’t have any significant debt, and demand for their products isn’t greatly impacted by interest rates. The fact that the economy has stayed strong is far more important to those stocks than the level of interest rates. In addition, there has been no contraction in earnings multiples despite sticky interest rates.
Small-caps, on the other hand, tend to be much more interest rate-sensitive. Many smaller stocks need to raise capital, which is more expensive when rates are high. They also tend to be more economically sensitive and are impacted when consumers feel they have declining buying power.
Big-cap technology stocks have become a safe haven for many investors when interest rates stay elevated. Valuations are irrelevant because the stocks have so much relative strength.
Apple has been ripping higher lately even though there has been no major increase in its EPS on its new AI programs. The stock trades with a trailing P/E of 32 but is expecting EPS growth of just 9% in the fiscal year ending September 2025. Smaller stocks seldom are rewarded with that sort of valuation, but Apple is considered to be immune to the factors that impact most stocks.
The question now is whether the market can continue to trend higher, although interest-rate cuts have been pushed back once again. There aren’t many potential catalysts out there right now as we move into slower trading during the summer months, but we will have to watch very carefully now for a shift in market character.
The soft CPI number saved the market on Wednesday, but Jerome Powell's hawkish tone can’t be ignored. Interest rates matter, and the market may eventually grow concerned that they aren’t being cut.
We have a quiet start on Thursday with PPI and weekly unemployment numbers coming up.
At the time of publication, Rev Shark had no positions in any securities mentioned.
