Here’s why stocks are rising and the surprise fall rally is underway

The S&P 500 hit another record high on Thursday, putting the benchmark on pace for a more than 20 percent year-to-date gain as investors continue to bet on the strength of the U.S. economy and the impact of interest rate cuts and stimulus. from major central banks around the world.

A resilient domestic economy — which grew 3% in the three months ended June and is advancing at a 2.9% pace in the current quarter — along with a newly accommodative Federal Reserve and a surprisingly tight labor market solidly laid the foundations of the US investment case. .

Tech stocks are also extending their early spring rally. That market move faded somewhat over the summer after a robust near-term sales forecast from chipmaker Micron Technology. (MU) added support to the larger AI investment narrative.

The S&P 500, which has a long history of declines dating back to September 1950, is on track to rise 1.3 percent, a move that would take its quarterly advance to just under 5 percent.

The S&P 500 has hit 41 record closing highs this year, with the benchmark on pace to test the 6,000-point mark in the coming months.

“Stocks continue to hit record highs,” said Bret Kenwell, US investment analyst at eToro. “While we may see some volatility over the next few months, the environment remains constructive as long as earnings growth remains strong and the economy continues to perform.

“The labor market remains a major risk for investors, as weakness would hurt consumers’ ability to spend and ultimately hurt GDP and the U.S. economy,” he added. “For now, though, consumers continue to defy their critics, which should be seen as a good thing for the Fed, the economy and the stock market.”

Stimulus from China gives stocks a boost

That case was boosted this week by a series of developments in China, the world’s second-largest economy and key trade rival, where officials unveiled the most comprehensive stimulus package in more than a decade.

A reading from the ruling Communist Party’s annual meeting also indicated a vow to spend whatever it takes to meet its annual target of 5 percent GDP growth.

The commitment is likely to focus on China’s export sector, its key growth engine, and spur a longer-term acceleration in manufacturing output and international trade, both of which are likely to have a disinflationary impact on commodity prices around the world .

Related: Goldman Sachs looks at stock targets after Fed rate cut

This downward pressure is also supported by rate cut signals from central banks in Europe, the UK and Canada. Also a factor: a surprise pause in policy from Japan, which has previously signaled a willingness to raise interest rates to shore up its struggling yen and boost the outlook for inflation in its aging economy.

In the US, the Federal Reserve’s recent extravagant half-percentage-point rate cut, which lowered the federal funds rate to 4.875%, is likely to be followed by more cuts through the end of the year and beyond. CME Group’s FedWatch tool pegs the benchmark rate at around 3% or even lower this time next year.

Corporate revenue growth is accelerating

Corporate earnings, meanwhile, continue to accelerate into the start of the third-quarter earnings season, with collective S&P 500 profits expected to rise 5.4% from a year earlier to $511.2 billion.

Full-year forecasts, according to LSEG data, peg 2024 earnings growth at 9.9%, more than double last year, and see 2025 earnings rising 15.2%.

“Based on historical performance for the S&P 500, the strong performance and momentum in the first nine months of the year could signal more gains ahead,” said Adam Turnquist, chief technical strategist at LPL Financial.

“Over the past 75 years, the last three months of the year have resulted in negative returns only eight times when momentum was strong in the first three quarters,” he added. The strategist noted that the largest of the four was linked to the October 1987 Black Monday crash.

Related: Stocks brace for big Fed hike after rethinking summer rate cut

Another factor driving markets higher this week and likely to provide a notable tailwind for consumer spending in the final months of the year is the sharp drop in global crude oil prices.

The OPEC cartel, led by Saudi Arabia and non-member allies such as Russia, has tried to prop up prices by cutting output for much of the past five years.

$3 a gallon gas on the road?

That effort, as well as a renewed focus on domestic energy production in the US, has led to large declines in market share and prompted, according to a report in the Financial Times of London, a move by Riyadh to abandon the longer-term target of Oil of 100 dollars per barrel.

WTI crude futures for November delivery, which are closely linked to U.S. gasoline prices, fell nearly $3 a barrel on Thursday to just below $67. Such a move would likely bring the average price per gallon of gas below $3 in the coming weeks.

That could prove crucial to overall spending sentiment, especially following the biggest monthly drop in the Conference Board’s reading of consumer confidence in more than three years earlier this week.

Related: Gas Prices Are Falling, and It’s Bigger News Than You Think

“Consumers are clearly concerned about the implications of the upcoming election, increasing conflict around the world and the stubbornly high cost of food and credit,” said Jamie Cox, managing partner for Harris Financial Group in Richmond.

Lower gas prices may mitigate this, but at the end of the day, labor market conditions will likely prove key to the market’s surprising fall rally.

More economic analysis:

• Stocks are bracing for a big push from the Fed after rethinking its summer rate cut
• Fed offers big rate cut, signals focus on cooling labor market
• Fed Dot Plot is more important than a rate cut

Recent jobless claims data was solid, with the number of Americans filing for unemployment benefits falling for the first time to a less-than-expected 218,000 last week, the lowest since mid-May.

The broader four-week average was also down, falling to 224,750, and recent figures from the WARN and Challenger Gray notices point to a steady trend in corporate layoffs.

“If there’s a problem in the labor market, it’s not showing up in the weekly jobless claims data,” said Chris Larkin, managing director of trading and investing at E-Trade From Morgan Stanley.

“However, as is always the case, the monthly jobs report will play a larger role in defining market sentiment,” he added. “But until there’s evidence to the contrary, numbers like this will likely keep hope alive and well.”

Related: Veteran fund manager sees world of pain coming for stocks