The S&P 500 is on course to its 5th month of gains in 2023. From lows of 3805 back in March, the S&P 500 clocked 4600 by the end of July. With such robust gains, is it time to fold, or are there odds of the market going up further?
To understand what is next, it is crucial to understand the stock market. Understanding stock exchanges and the key factors that drive them can help develop the bigger picture, including the market’s potential risks.
Luckily, you don’t have to spend too much time getting this information. This article looks at the factors that can influence the stock market for the remainder of 2023 and into the medium term.
In terms of the potential for more upside, The Fed, and Artificial Intelligence could be among the key drivers as explained below.
The Fed
The Federal Reserve is one of the most critical determinants of the market’s overall direction. An increase in interest rates tends to affect the performance of the S&P 500 and the stock markets in general, as was seen in 2022. Similarly, low-interest rates spur growth in the stock markets, as was witnessed between 2009 and 2021. At the moment, the Fed is coming off a hawkish stance in a bid to tame inflation. With inflation dropping, the Fed could slow down on the rate hikes and eventually move towards lowering them. This means the stock market could enter another bullish cycle not just in 2023 but into the near term.
The Entry Of AI
Artificial Intelligence is not just a buzzword but one of the technologies set to revolutionize the world as we know it. While some analysts fear that AI could lead to mass unemployment, others believe the increase in productivity that AI will bring could add trillions of dollars to the economy. This, by extension, means stocks, especially top tech stocks that make up the S&P 500, could see a surge in valuations in the future.
For instance, Apple, Microsoft, and Amazon are all heavily invested in the AI race, and as it begins to bear fruit, the results will reflect in the overall valuation of the S&P 500. It’s one of the key reasons to be bullish on the future of the stock markets, especially the S&P 500.
However, even as the outlook of the S&P 500 looks bullish overall, there are risk factors that every investor should take note of. Here are some of them.
Geopolitics
The war in Ukraine was one of the key reasons why the S&P 500 dropped for the better part of 2022. However, an even bigger geopolitical crisis is brewing between the US and China – two of the world’s largest economies. If war breaks out between these two giants, it could devastate the stock markets. Even without an open war, the continued hostilities as the two countries try to decouple from each other could trigger a bear trend in the S&P 500 as supply chains will become more expensive. That’s because most companies in the S&P 500 rely heavily on global supply chains.
Another Round Of Rate Hikes
While the Federal Reserve has done much to tame inflation, the job still needs to be fully done. This explains why the Fed Chairman left the door open for further rate hikes in the July Fed announcement on rates. If the current measures don’t tame inflation, more aggressive rate hikes could hamper growth in the stock markets.
Conclusion
The S&P 500 has recorded significant growth in the last five months. Even after this rally, there is much to look for going into the future. With the Fed softening its stance on rate hikes and AI set to revolutionize industries, the future is bright for stocks. However, it is essential to note that risks such as another round of rate hikes and escalating tensions between China and the US abound. Overall, it all boils down to risk management.
