VIX Calms Down: Is the Worst Over for U.S. Stocks?

After a lackluster April, the US stock market kicked off May with a promising startThis rebound was buoyed by dovish remarks from Federal Reserve Chairman Jerome Powell following a recent interest rate decision, creating optimism among investorsThe subsequent non-farm payroll report hinted at a softening labor market, which in turn suggested possible interest rate cuts in the futureAs Treasury yields peaked and then began to descend, technology stocks once again led the marketThe S&P 500 index was seen challenging its 50-day moving average, while the market's volatility gauge, the VIX index, dropped to its lowest level since the end of March.

Looking ahead, the coming week promises to be eventful as corporate earnings reports continue to influence market dynamicsInvestors will also be keenly monitoring statements from Federal Reserve officials regarding their policy stance.

In a recent announcement, the Fed maintained interest rates, emphasizing the lack of significant progress towards achieving the 2% inflation target

The central bank stated that it remains cautious about the risks associated with rising pricesNotably, Powell voiced, on record, that the next steps taken by the Fed are “unlikely” to involve interest rate hikes, asserting that the current policy stance should effectively curb inflation.

Bob Schwartz, a senior economist at Oxford Economics, remarked in an interview that Powell's statements were more dovish than many anticipatedHe noted that while the door for interest rate cuts later this year is not yet closed, this scenario relies heavily on forthcoming economic dataRecent consumer price increases have been linked to lingering seasonal and special factors, although housing inflation remains a persistent concernMarket data indicates that a decline in housing inflation may take longer than expected, yet it is anticipated to materialize eventually.

The slowdown in economic activity has fueled expectations for a policy pivot

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Last month, the US economy added just 175,000 jobs, marking the smallest increase since September of the previous year, and the unemployment rate edged up from 3.8% to 3.9%. Additionally, wage growth dropped to a month-over-month increase of merely 0.2%. The Job Openings and Labor Turnover Survey (JOLTS) revealed that the number of job vacancies fell to 8.5 million, the lowest level in over three years, reinforcing the notion of cooling in the labor market.

Moreover, the Institute for Supply Management’s (ISM) services index fell below the neutral level for the first time in 15 months, alongside a halt in the recovery of manufacturing across various regions in the United States, highlighting intensifying pressures of economic deceleration.

US Treasury yields fell to their lowest level in three weeks, prompting the market to reassess the timing of potential interest rate cuts by the Fed

The closely watched two-year Treasury yield dropped from nearly 5% two weeks ago to 4.80%, while the benchmark ten-year Treasury yield fell below 4.50%, marking the steepest weekly decline since last DecemberAccording to federal funds futures, the probability of a rate cut in September surged to nearly 70%, whereas earlier in the week, investors believed the Fed would hold off until November.

John Lynch, Chief Investment Officer at Comerica Asset Management, commented on the drastic shift in interest rate pricing, suggesting that market sentiment had swung from hope for rate cuts to optimism regarding economic strengthYet, any signs of demand slowdown could bring monetary easing back onto the table.

Schwartz further elaborated that persistent inflation and economic growth have made Fed officials cautious about easing rates, but Powell dismissed concerns regarding stagflation

“The latest employment data help restore confidence among Fed officials that the inflation rate can revert to 2%,” Schwartz notedHe speculated that it now seems plausible for the Fed to take action in September, though numerous variables remainThe overall health of the labor market must be taken into account, as the Fed requires several positive inflation reports before considering bank rate reductions.

The recent market rebound seems poised to continue, as last week's fluctuation in the US stock market saw initial declines followed by significant gains, fueled by the hopeful prospect of rate cuts and encouraging non-farm payroll data reigniting risk appetiteThe S&P 500 index rebounded above the 5100 mark, now merely 2.5% shy of its record highFactSet reported that the Cboe Volatility Index (VIX) dropped to 13.49, the lowest since March 28, returning to levels seen prior to the market's recent plunge driven by inflation worries.

As the earnings season moves into its second half, positive corporate performances have become key drivers of this market resurgence

As of last Friday, 77% of companies in the S&P 500 that have reported their earnings exceeded expectationsAnalysts now project a 6.6% year-over-year growth in net profits for Q1, a notable improvement from the earlier forecast of 5.1% made in early April.

Technology stocks continue to command attentionGoogle’s market capitalization has stabilized at $2 trillion, and Nvidia’s stock approaches the $900 markApple's announcement of a $110 billion share repurchase program has reinvigorated interest, as the company expands its focus on artificial intelligence research and partnerships while gearing up for its spring product launch eventInvestors are betting on Apple's potential to reignite consumer enthusiasm through new offerings.

Ryan Detrick, Chief Market Strategist at Carson Group, remarked on the rebound saying, "Powell's stance hasn’t shifted significantly

He acknowledged that inflation remains a concern, yet he maintains an optimistic outlook for price stabilization in the upcoming quarters.” He added, “It’s precisely due to the Fed’s determined stance against rate hikes that the bulls are seizing control.”

Despite a general trend of net selling in equity funds among US investors for the fifth consecutive week, with a reported total divestment of $5.48 billion, there remains strong demand for large-cap equity funds, which saw net purchases of approximately $1.2 billion, largely thanks to robust profits from companies like Google and MicrosoftSimultaneously, net inflows into money market funds totaled $26.53 billion, marking a second consecutive week of rebound.

Charles Schwab highlighted in their market outlook that the disappointing jobs report and Apple’s earnings have rekindled optimism in the market