S&P 500 index 6% away from creating history! Will it cross all-time high levels in 2023?

US stocks are in the middle of some interesting economic dynamics. Corporate America is standing out, inflation is cooling down, earnings are mixed and GDP holding on against US Fed’s aggressive rate hike campaign. Amidst all this, investors are pinning hope on an AI boom to take markets to higher levels.

What’s standing in the way is the US Federal Reserve and its monetary policy. US stocks are in the bull market and investors are now watching to see if the Federal Reserve will halt the market’s bull run. The next FOMC meeting is on July 25-26.

The S&P 500, a leading barometer of the US market, is at a striking distance from its all-time high levels. On January 3, 2022, the S&P 500 index closed at an all-time high of 4,796.56 points, while on January 4, 2022, it touched an intraday level of 4,818.62. Today, S&P 500 is at 4,536.34, 282 points short or 6.22% lower.

When will Fed pivot and how dovish will the central bank sound remain to be seen? US Fed chief’s press conference will, therefore, hold the key for future guidance. Investors, meanwhile, will also take into account how quickly core inflation decelerates and the impact of recent rate hikes on business profitability and consumer demand.

A total of 170 S&P 500 businesses, or about 40% of its market capitalization, are expected to report earnings, including market leaders Microsoft Corp., Meta Platforms Inc., and Alphabet Inc., the parent company of Google.

“With important corporate earnings reports looming and Fed Chairman Jerome Powell taking the mound next week in Washington and next month at Jackson Hole, investor expectations may be riding too high. Rallying this hard into earnings season raises investors’ expectations of companies, making additional gains from here harder to come by,” says José Torres, Senior Economist at Interactive Brokers.

For the time being, investors may be assured that the profits picture is improving. While profits for S&P 500 companies are expected to fall for the third quarter in a row, earnings are growing when the energy sector is excluded.

“Markets are reacting positively to slower economic data that may allow the Federal Reserve to avoid another 25-bp hike in September or November. Well-received earnings are also supporting hopes for the soft-landing narrative, as investors bet that economic data can continue weakening slowly enough without the country slipping into a recession, thereby supporting higher profits in the medium term,” adds Torres.

Whether S&P 500 creates history in 2023 by making a new all-time high level, only time will tell. As reasons for the bullish sentiments continue to be heard, one should not forget that market always has a surprise up its sleeve for the investors.