US shares flirt with document highs as traders eye extra Fed price cuts

US stock markets are inching closer to all-time highs as the prospect of further interest rate cuts and the artificial intelligence boom continue to drive investor flows.

The tech-heavy Nasdaq and the S&P 500 are each up roughly 24 per cent since the start of the year, with the latter hitting a record high this week, despite a toxic cocktail of global conflict, flagging economic growth in Europe and China, and recent oil price volatility.

The Dow Jones has added just shy of 15 per cent this year, having closed at a record high in four of the last five trading sessions.

UBS expects 50bps worth of Fed rate cuts in the remainder of 2024 – with 100bps lined up for next year 

US stocks have been boosted by a bigger than expected 50 basis point Federal Reserve interest rate cut in September, as well as booming profits for AI-linked names like Nvidia and TSMC.

The FTSE 100, which has far less tech exposure, is up by around 8.3 per cent since the start of the year while the MSCI World Index has added just shy of 20 per cent.

Richard Hunter, head of markets at Interactive Investor, noted the US consumer has also proved itself to be ‘in rude health’, following better than expected retail sales and lower than expected jobless claims published this week.

He said: ‘The perfect scenario of a soft economic landing is becoming increasingly possible, which in turn gives the Federal Reserve more optionality in its interest rate deliberations.’

Fed rate cuts have helped propel US stock markets to all-time highs in 2024 

The Dow, S&P 500 and Nasdaq were at 43,239.05, 5,841.47 and 18,373.61 points, respectively, on Friday morning. This compares to respective intraday all-time highs of 43,289.76, 5,815.03 and 18,671.07.

In note on Friday analysts at UBS, which continues to ‘remain positive on the broader tech industry, especially the AI-linked segment’, dismissed investor concerns that stronger than expected US economic data would lead to the Fed holding off on further rate cuts.

They said: ‘We continue to expect another 50 basis points of cuts by the end of this year, and a further 100 basis points in 2025.’

This would bring the Fed’s target range to 4.25 to 4.5 per cent by the end of 2024, and to 3.75 to 4 per cent by the end of 2025.

UBS added: ‘Overall, with inflation moderating, spending remaining healthy, and the labour market holding steady, we expect the Fed to continue cutting interest rates in November and December, with further easing likely in each quarter in 2025. We like US equities.’

Interactive Investor’s Hunt said: ‘US markets are currently in a sweet spot.

‘The central driver has been the increasing possibility that the Federal Reserve will have been able to engineer the fabled ‘soft landing’ for the economy, avoiding the situation whereby higher interest rates and slowing growth can inevitably lead to recession

‘Inevitably there are some concerns that the market could be overheating given higher valuations, while corrections inevitably happen as part of the investment story. For the moment, however, the scene seems set fair for further potential gains.’