Will the Market Sustain its Upswing?

Better than expected first quarter earnings, decelerating inflation and growing optimism about a soft, non-recessionary landing have driven the market's positive 2023 start.

The bear may have entered hibernation in June, but can we now count a bona fide bull? That may be overselling it. Equities capped off a remarkable first half of the year by continuing to gain value even as the Federal Reserve (Fed) signaled that its inflation-fighting program could yield two more rate increases in 2023. But with a long-expected recession still failing to appear, investors seemed to focus, instead, on the possibility of a pain-free untying of 2022’s post-COVID tangles.

“The equity market behaved surprisingly well given that it went from expecting rate cuts in 2023 to having them pushed out until 2024,” said Raymond James Chief Investment Officer Larry Adam. “A better-than-expected first quarter earnings season, decelerating inflation, growing optimism about a soft, non-recessionary landing and the AI-powered tech rally have been key drivers behind the recent upswing.”

The tech-heavy NASDAQ saw its best first half of the year in four decades, rising almost 30% year-to-date.

Despite these gains, near-term caution is warranted. The recent surge in investor optimism suggests the market may be due for a pullback. Meanwhile, bond yields – primarily at the front end of the yield curve – backed up in reaction to the Fed’s increased hawkishness, and the yield curve remains deeply inverted, which suggests a coming recession.