US Debt Deal May Spur More Fed Action

A deal has been made to raise the $31.4 trillion debt ceiling. Wall Street may now focus on other risks, such as more Fed interest rate increases and reduced fiscal spending.

The Fed had a meeting on May 3. They might stop raising rates for a while. This is the most aggressive rate hike since the 1980s. Their next meeting is on June 13. This news made investors more interested in risky investments like stocks.

The S&P 500 is doing well this year, up more than 9.4%. It's now trading at almost 19 times its forward earnings, which is high compared to what it has been before. Big tech and growth companies have been helping it keep growing, as lower interest rates have helped them.

Emily Roland, co-chief investment strategist at John Hancock Investment Management, said there has been a change in how equities are valued. This has been called a "pivot party". It is based on the idea that the Fed will stop doing what it has been doing and go back the other way. This has made risk assets more valuable.

We believe that there isn't much more room for growth.

Two Fed officials say inflation is not cooling enough. The Dallas Fed Bank president, Lorie Logan, and St Louis Fed president, James Bullard, have made the statement since May 3.

On May 26, the economic data was more powerful than expected. The core inflation rate increased from 4.6% to 4.7%, way above the Fed's target of 2%. The data seemed to support their views.

The chances of the Fed increasing rates by 25 basis points in its June 14 meeting are now at about 50-50. This is higher than the 8.3% chance from one month ago. CME's FedWatch Tool provides these market predictions.

The debt ceiling might go up soon. But, this will lead to a limit on how much money the government can spend.

Tony Rodriguez from Nuveen thinks that the US economy may go into a recession despite strong labour market if inflation is not controlled by higher interest rates.

The economy might slow down. Why? Some of the things that were helping it are now hurting it.

People expected the US economy to go into recession by mid-2022. But it hasn't happened yet. Investors want to see how many people have jobs and if they can spend money. They will check the jobs report next Friday to get an idea of what's happening.

Analysts predict the S&P 500 will have a 1.2% earnings growth in Q3 and 9.2% in Q4. Refinitiv is the source of this information.

Josh Jamner from ClearBridge Investments worries that higher inflation, caused by strong economic signs, could result in more rate hikes by the Fed. This could impact investor sentiment in the future.

He said that we either pick a soft landing and risk stock multiples or rate cuts and chance a recession.

Stocks were affected by the debt ceiling issue. Many investors thought Washington would solve the problem. However, Roland thinks this won't cause a lasting uptick in the stock market.

She said the equity market is starting to factor in more hikes by the Fed. This is happening now.

Companies who borrowed money during the pandemic era with ultra-low interest rates will face pressure as rates are set to rise in the second half of 2023. They will either have to repay the debt or find a new way to finance it. This information comes from Bryant VanCronkhite, Senior Portfolio Manager at Allspring Investments.

S&P Global Ratings says around US$6.5 trillion that was issued from 2020 to 2021 will mature by 2025.

He thinks the effects of monetary policy are setting up a big debt wall. People aren't talking about it clearly enough.