Dow Jones Industrial Average managed to advance to more of its historical highs yesterday, surpassing the 40,300 level for the first time.
The same applies to the S&P 500 index, which touched the level of 5666 before falling.
The Dow Jones gains were supported by the second-heaviest stock in the index, Goldman Sachs, after better-than-expected earnings results for the Q2, in addition to optimism about the return of Donald Trump to the White House, betting on a less stringent regulatory environment and the near certainty of the possibility of an interest rate cut next September.
Yesterday, we witnessed Goldman Sachs recording revenues of $12.73 billion and earnings per share of 8.62 for the second quarter of this year, both of which were better than expected.
These results followed the results of major banks, including JPMorgan, Citi Group, and Wells Fargo.
While Goldman had recorded growth for the second consecutive quarter in investment banking revenues, by 21%, and this growth was not absent throughout the past year, with the exception of limited growth in the third quarter.
Meanwhile, the quarterly reports of these banks indicated a noticeable return to risk appetite in the markets, which was reflected in an increase in investment banking and trading revenues, in addition to the noticeable growth in merger and acquisition activities.
In other words, it can be said that the markets are optimistic about achieving a soft landing of inflation and avoiding recession even as interest rates remain higher-for-longer, which justifies continued gains in the broader stock market. It seems that the markets enjoy high sentiment, even in light of the current interest rate environment.
Today, the markets are focusing on the results of UnitedHealth, the heaviest stock in the Dow Jones, which will be announced before the opening. While better-than-expected results would enhance the index’s gains to more historical levels.
During the past few days, we have also witnessed the highest sentiment about the possibility of achieving a cut in interest rates starting next September, after the slowdown in inflation, in addition to the statements of the Chairman of the Federal Reserve that supported this hypothesis, and this has strengthened the gains of the stock market that has high bullish momentum.
Jerome Powell spoke of further progress in confronting inflation, which remains on track towards his target of 2%. Powell also spoke of his optimism about the path of inflation in light of the recent data – which he had been waiting for a long time.
Except, of course, the Chairman of the Federal Reserve had avoided indicating a specific date for the start of the rate cut, but the markets have become more optimistic about achieving this in September than ever before. The probability of this 25-basis point cut has reached 90%, according to the CME FedWatch Tool.
US stock markets are optimistic about the possible return of Donald Trump to the White House, and this in turn may be reflected in a less stringent regulatory environment, the return of tax cuts, and favoring domestic companies at the expense of foreign ones.
But let us not forget that Trump’s return may in itself create a state of uncertainty, which is through fears of a possible rise in inflation in conjunction with the rise in the deficit that the tax cut may cause, and this may later be evident through the return of bond yields to rise.
While we have already gotten some kind of these signals, the ICE BofAML U.S. Bond Market Option Volatility Estimate Index (MOVE), which is a measure of uncertainty in the bond market, posted its largest daily gain in a month at 8.89% yesterday. While bond yields are now under pressure to decline due to optimism about lowering interest rates, they may return to rising again with the pressure of rising deficits and inflation. These opposing trends are what create uncertainty in fixed income markets.
Add to this the factors that may not become apparent before they happen, namely the geopolitical developments around the world that Trump may create with his return. I do not think that he would show any leniency towards the negotiations on the Iranian file or Gaza, which might push him to further escalation in the Middle East, which might push the region into more chaos without any strategic gain for the United States.
This is what actually happened during his previous term, and I think he is actually responsible for what we are in now on the various fronts there.