The Dow Jones Industrial Average broke through the 40,000-point mark for the first time on Thursday morning, May 16th, in the midst of the US Federal Reserve’s continuous rate hikes over the past two years to cool down the overheated economy. This milestone appears particularly unbelievable against such an economic backdrop.
In Thursday morning trading, the Dow Jones Index rose by 0.23% to 40,000.35 points, marking the latest peak in this bull market that began in October 2022. The economic momentum in May was reignited by strong corporate earnings and weak inflation data.
So far in 2024, the Dow Jones Index has risen by more than 6%, while the S&P 500 Index and the Nasdaq Index have each risen by 11%. Both the S&P 500 Index and the Nasdaq Composite Index remained flat on Thursday.
The recent stock market rally is attributed to the continued strength of the US economy and market expectations of the Fed’s first rate cut in September. Recent data shows a slowdown in job growth in April, but the labor market remains strong, and inflation has eased from its peak but has not yet reached the Fed’s target of 2%.
Expectations of a rate cut by the Fed and developments in artificial intelligence have boosted investor sentiment. According to the FedWatch tool from CME Group, the market predicts that the Fed is likely to cut rates for the first time in September.
After reporting that consumer price inflation in April was lower than expected earlier this week, expectations for a rate cut have strengthened. The latest data released on Wednesday shows the smallest increase in core consumer prices (excluding categories such as food and energy) since April 2021.
According to Dow Jones market data, the index has traded above 30,000 points for 873 trading days since November 2020.
CNBC reported that retail giant Walmart’s stock price rose by 6% on the strength of its first-quarter performance, leading the Dow Jones Index to break through the 40,000-point mark. Walmart’s stock price has risen by 26% so far this year.
Amazon joined the Dow Jones Index in the first quarter of 2024 and saw its stock price rise by over 22% for the year. Other top performers in the Dow Jones Index this year include American Express and Goldman Sachs. Both stocks have risen by over 20% as investors bet on the economy avoiding a recession and consumer spending remaining strong.
Importantly, stocks of tech giants like Amazon, Meta Platforms, and NVIDIA have all seen significant increases so far in 2024.
Baird analyst Ross Mayfield believes that this uptrend still has momentum to continue.
In many aspects, the market outlook appears optimistic. Besides the “Magnificent Seven” of US stocks, small-cap and industrial stocks have been rising recently, which could be a hopeful sign of a rebound. Even Bitcoin and gold prices have reached historic highs in recent months. The Magnificent Seven refers to Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and Meta Platforms.
However, some investors are concerned that stocks appear to be expensive, especially large-cap stocks. If companies underperform, they could become vulnerable.
Data from FactSet shows that earlier this week, the price-to-earnings ratio for the S&P 500 Index was nearly 21 times the forward earnings estimates, higher than the 10-year average of about 18 times. Microsoft’s estimated P/E ratio is about 32 times, NVIDIA’s is 35 times, and Amazon’s is 37 times.
Don Calcagni, Chief Investment Officer at Mercer Advisors, stated, “I do believe that US stock market valuations are approaching a reckoning.”
“Given how high interest rates are currently, it seems illogical,” he added somewhat anxiously.
The current federal funds rate has reached 5.25% to 5.5%, much higher than in the years before the COVID pandemic. The yield on the 10-year US Treasury bond set to mature in October is expected to exceed 5%, the first time in 16 years. Compared to the 1.909% at the end of 2019, the current bond yield is more than twice as much.