Last week the US central bank kept rates unchanged, breaking a string of 10 consecutive meetings in which it has lifted rates, totaling 500 basis points over the last 14 months. The pause was cautious as the inflation index continued to tumble. Consumer price index (CPI) nosedived to 4%, with June projections for another substantial slowdown to 3.2% on a year-over-year basis.

With inflation slowing down and signs of an economic softening emerging, the possibility of a soft-landing scenario for stocks goes up. The likelihood of reaching the end of the hiking cycle increases as inflation declines. If this is the case, the next bull market may be just beginning.

Something for the bulls

Optimistic investors are buying stocks hoping that the economic and earning recession will not materialize. On top of that, the market seems unphased by the fed hiking cycle, already looking past the rate hikes and pricing in rate cuts.

The S&P 500 is already up over 14.8% year-to-date. And if history is any guide, a strong performance of the S&P 500 in the first half of the year typically (81.8% chance) leads to a solid performance in the second half, data over the last 50 years shows.

More bullish signs

The exuberance around artificial intelligence has led to overconcentration issues by seven tech stocks carrying the S&P 500 into bull territory this year. However, this narrowness is not necessarily bad for the equity market. There are historical cases where equity upside came from a narrow set of companies. Furthermore, even when the big winners did a pullback, the broader market played catch-up and held up well, with overall gains outnumbering losses.

The earnings recession has been avoided so far. In fact, forecasts for S&P 500 were revised upward, implying that the corporate profitability outlook might be better than many analysts expected.

Something for the bears

However, at nearly 19.5 forward earnings, the S&P 500 looks anything but cheap. On a technical level, the S&P is above its 200 daily moving average, which almost certainly guarantees some turbulence ahead.

From a macro perspective, the trends in inflation and labor markets are encouraging, but they are still at levels that warrant further tightening. Cyclical inflation might return, which will cause market turmoil.

For now, the immaculate disinflationary scenario is playing out with the market happily front-running the hypothesis of inflation’s pandora box closing again soon. Nevertheless, additional tightening reduces this likelihood as more rate rises will further exacerbate the banking sector’s challenges and add extra pressure on consumers and businesses.

Yesterday, Fed Chair Powell declared to Congress that there is a “Long Way To Go” in the inflation fight, leaving the door wide open for possibly two more rate hikes. Equities have been ignoring the Fed warnings, dancing to the tune of hopefully more optimistic central bank narratives, but that tune might soon fade out.