Positive sentiment drives stocks in January, especially in European markets such as Euro Stoxx, CAC 40 and DAX which are so far over 9% YTD. Investor expectations are also encouraged by cooling inflation data as well as rebounding bank stocks who experienced worrisome outlooks previously. Results of major US Banks pushed the S&P above its 200-day moving average, just above 4,000; while Nasdaq rallied for a sixth straight day to contribute to its biggest winning streak since November 2021.

Following the positive inflation data experts are discussing the idea of a 25bp increase at the FED’s next meeting on the 1st of February and eventually a pause in increases for future meetings.

“US short-term inflation views fell in early January to the lowest in nearly two years, providing a bigger-than-expected boost to consumer sentiment. Pricing pressures are weakening across many sectors, paving the way for the Federal Reserve to downshift its pace of hikes to 25 basis points at its next gathering. We shouldn’t be surprised if the Fed starts talking about pausing in the near future.”, CIO of Goldman Sachs stated. Other GS strategists added that “Because of its strength, interest-rate risk remains higher than the market is pricing. S&P 500 earnings revisions are pointing to “a hard landing”, even though the market is pricing in a soft landing. If there is no recession, as the team expects, S&P 500 earnings per share growth will be flat this year”.

In response to Thursday’s news showing a further slowdown in prices, Fed Bank of Atlanta President Raphael Bostic said CBS News, he is leaning toward backing a lesser rate hike at the next meeting. Traders will gain insight into how the aggressive Fed program to control inflation has affected profit margins during the coming weeks.

Most experts remain more cautious; CIO of CIBC Private Wealth said that “It’s a back-and-forth market. I don’t really buy the intense gloom that some people have that it’s going to get much worse, or the other extreme that we’ve already started a new bull market. I don’t think we’re there yet either”. Jack McIntyre, portfolio manager at Brandywine Global said “We have been in the inflationary bus, which is a fancy way of saying stagflation, and that’s not a great environment for financial assets. Equities don’t like the slowing economic activity and bonds don’t like the inflation part of it. So, we should get resolution this year on how do we break out of that stagflationary environment.”

Others see a more positive environment in the second half of 2023. US stocks could experience another decline before recovering in the second half of the year after the economy stabilizes, predict strategists at Bank of America Corporation lead by Michael Hartnett. Despite positive news in recent weeks, according to former Treasury Secretary Lawrence Summers, the US economy is still in a recession this year.

Although the economy is still healthy, Jamie Dimon, the CEO of JPMorgan, stated that we still do not know the eventual consequence of the headwinds approaching.