S&P 500 Cautious Amid Hawkish Rhetoric and Rate Hike Expectations

The S&P 500's recent performance has been cautious in response to Kevin Warsh's 'hawkish' speech at Jackson Hole. Historically, when central bank governors meet there, the index has fallen or risen by 3% or more four times since 1999. In these instances, the average gain was a modest 0.4%. The Atlanta Fed's leading indicator forecasts US GDP growth of 4.6 per cent in the third quarter, with an estimated 0.2 percentage points attributable to the rollback of tariffs.

Kevin Warsh believes that current interest rates are not restrictive enough, suggesting they're not holding back economic growth. Corporate profits rose by 53% in April, June, and revenue increased by 16% year-on-year, thanks to a strong corporate earnings season. Fundamental valuations, including P/E ratios, do not appear stretched.

However, there are grounds for concern. The probability of a federal funds rate hike in September has jumped to 60%, according to futures market assessments. This is accompanied by increased Treasury bond yields and higher borrowing costs for S&P 500 issuers, which is holding back earnings growth. Fears about the effectiveness of investments in artificial intelligence technology persist.