S&P 500 futures rise and Dow set for new record on Fed rate-cut optimism

What’s driving markets

Investors remained in a buoyant mood after the U.S. central bank on Wednesday surprised traders by indicating its cycle of interest rate hikes was over and it was thinking of cutting rates by 75 basis points in 2024.

The Bank of England and European Central Bank are both expected to leave their main interest rates at 5.25% and 4% respectively later on Thursday.

The prospect of lower U.S. borrowing costs next year has energized equities and bonds, pushing the Dow Jones Industrial Average to its best ever level and dragging the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
to its lowest print since early August.

See: Dow scores its highest close in history. Here’s what that means in the big picture.

“This unexpected shift resonated harmoniously with investors as the ‘rallying cry ‘ was heard from every corner of global financial markets.” said Stephen Innes, managing partner at SPI Asset Management.

“The Santa rally shifted into high gear in off-to-the-races fashion as Treasury yields bound towards 4%, and equities surged,” Innes added.

Indeed, the nascent Thursday session saw continued investor optimism, with 10-yearTreasury yields — which in October were above 5% — dipping further to 3.95% and stock-index futures extending their rally.

The Dow was in line for a new record, helped by shares in Apple
AAPL,
+1.67%,
the world’s biggest company by market market capitalization, also looking to hit a fresh record at the opening bell.

The S&P 500, which has gained 22.6% so far in 2023, was in line Thursday to open only about 2% shy of its record. An indication that the positivity is spreading beyond just the heavyweight technology stocks can be seen in the S&P 500 Equal Weight Index
XX:SP500EW
sitting at its best level in 21 months.

However, there are signs that traders may be overly confident and the rally is overextended in the short term, some analysts observed.

The CBOE VIX index
VIX,
an option-derived gauge of expected S&P 500 volatility, which tends to fall when investors are bullish, was trading just below 12, its lowest in about four years.

And the S&P 500’s 14-day relative strength index, a momentum gauge, closed Wednesday’s session at 78.2, according to Dow Jones data, well above the overbought threshold of 70.

“Technically the snapback in multiple sectors in the last month is certainly a positive heading into 2024. Unfortunately, U.S. equities show RSI readings at elevated levels and the risk/reward scenario certainly hasn’t improved after a [roughly] 13% rally in the last seven weeks,” said Mark Newton, head of technical strategy at Fundstrat.

U.S. economic updates set for release on Thursday include the weekly jobless claims data, November retail sales and November import prices, all due at 8:30 a.m. Eastern. Business inventories for November will be released at 10 a.m.

Costco
COST,
+1.99%,
the retailer, and Lennar
LEN,
+3.29%,
the homebuilder, will release results after the closing bell