U.S. Stock Futures Rise as Fed Takes Dovish Turn

U.S. stock futures are on the rise early Thursday as investors are still basking in the unexpected dovish pivot by the Federal Reserve.

Market Performance

On Wednesday, the three major indices showed remarkable gains. The Dow Jones Industrial Average surged by 512 points or 1.4% to reach 37,090. The S&P 500 also had a significant increase of 63 points or 1.37%, bringing it to 4,707. Likewise, the Nasdaq Composite experienced a boost of 201 points or 1.38%, taking it to 14,734.

Fed's Surprise Announcement

Investors continue to maintain a positive outlook as the U.S. central bank surprised traders on Wednesday by signaling an end to its interest rate hike cycle. Moreover, it indicated its intention to cut rates by 75 basis points in 2024.

Bank Rates

The Bank of England and European Central Bank are both expected to maintain their main rates at 5.25% and 4%, respectively, later today.

Impact on Stocks and Bonds

The anticipation of lower borrowing costs in the U.S. next year has injected enthusiasm into the equities and bonds markets. Consequently, this has propelled the Dow Jones Industrial Average to its highest level ever and pushed the benchmark 10-year Treasury yield to its lowest point since early August. It's worth noting that bond yields move inversely to prices.

Investor Reaction

Stephen Innes, managing partner at SPI Asset Management, stated, "This unexpected shift resonated harmoniously with investors as the 'rallying cry' was heard from every corner of global financial markets."

He further added, "The Santa rally shifted into high gear in off-to-the-races fashion as Treasury yields bound towards 4%, and equities surged."

Current Market Outlook

The current Thursday session continues to reflect investor optimism. This is evidenced by the further dip in 10-year Treasury yields to 3.95%. Additionally, stock-index futures are extending their rally.

The Dow is anticipated to set a new record, with the support of shares in Apple (AAPL), which is the world's biggest company in terms of market capitalization. Apple is also expected to hit a fresh record at the opening bell.

The Positivity Spreading Beyond Technology Stocks

The S&P 500, which has gained 22.6% so far in 2023, is on the verge of breaking its record. The positivity in the market seems to be extending beyond just the heavyweight technology stocks, as indicated by the S&P 500 Equal Weight Index reaching its highest level in 21 months.

Signs of Overconfidence and Possible Overextension

However, some analysts are cautioning that traders may be overly confident and that the rally may be overextended in the short term. A couple of indicators seem to support their concerns.

The CBOE VIX index, which measures expected S&P 500 volatility and tends to decrease when investors are bullish, is currently trading just below 12, its lowest level in about four years.

Additionally, the S&P 500's 14-day relative strength index (RSI), a momentum gauge, closed Wednesday's session at 78.2, well above the overbought threshold of 70, according to Dow Jones data.

Mixed Outlook for U.S. Equities

"Technically, the recent rebound across multiple sectors in the last month is certainly a positive sign heading into 2024," says Mark Newton, head of technical strategy at Fundstrat. However, he adds, "Unfortunately, U.S. equities show elevated RSI readings and the risk/reward scenario hasn't improved after a roughly 13% rally in the last seven weeks."

Key Economic Updates on the Horizon

Several important U.S. economic updates are set to be released on Thursday. These include the weekly jobless claims data, November retail sales, and November import prices, all scheduled for 8:30 a.m. Eastern time. Additionally, business inventories for November will be released at 10 a.m.

After-Hours Results from Costco and Lennar

After the closing bell, investors will be eagerly awaiting the release of results from Costco (COST), the retailer, and Lennar (LEN), the homebuilder.

Stay tuned for the latest developments in the market.