U.S. stocks closed higher with the S&P 500 index reaching a new record high, boosted by Powell's continued signals of a rate cut.

On Thursday (March 7) Eastern Time, the S&P 500 index hit a historical high, indicating investors' positive expectations for the Federal Reserve's upcoming monetary easing policies.

Technology stocks led the gains, with NVIDIA's stock price soaring more than 4%, and its market value breaking through the $2.3 trillion mark.

Federal Reserve Chairman Powell hinted that U.S. inflation is moving towards the 2% target, suggesting that the Fed may be close to having enough confidence to initiate a rate-cutting process.

Advertisement

The market generally believes that a rate cut will help reduce corporate borrowing costs, stimulate economic activity, and enhance the attractiveness of risk assets such as stocks.

Encouraged by this news, not only did the overall U.S. stock market rise, but also the market sentiment was optimistic, with the Dow Jones Industrial Average also reaching a historical high in the near term.

Meanwhile, high price-to-earnings ratios remind investors to pay attention to market valuation levels; the Shiller P/E ratio of the S&P 500 index has exceeded the long-term average by about 45%, indicating that the market may have a certain risk of valuation bubble.

However, against the backdrop of strong rate cut expectations, investors will focus more on the positive impact of increased liquidity on the stock market in the short term.

During Thursday's trading, the S&P 500 index rose to a high of 5165.62 points, and the Nasdaq Composite once rose to 16309.02 points, both setting intraday historical highs.

Federal Reserve Chairman Powell continued to testify before Congress on Thursday.

This was Powell's last appearance before the Federal Reserve's interest rate meeting on March 19, so his speech was highly anticipated by the market.

Just like on Wednesday when he testified before the House of Representatives, Powell also read a prepared statement at the Senate Banking Committee on Thursday.

The statement reiterated Powell's remarks after the monetary policy conference at the end of January, suggesting that if the economic situation changes as expected, it might be appropriate to start cutting interest rates at some point this year, but the economic outlook is uncertain, and there is no guarantee that inflation will continue to fall to the Fed's target of 2%.

Before deciding to cut interest rates, Federal Reserve officials need to be "more confident" that inflation will fall back to 2%.

Powell hinted in the subsequent Q&A session that the Fed is not far from the confidence needed for a rate cut.

He said on Wednesday to the House Financial Services Committee that although the Fed is taking a cautious attitude given the uncertain economic outlook, interest rates may have peaked and are expected to decline this year.

Powell said to the Senate Banking Committee on Thursday that the Fed is "not far" from gaining enough confidence, believing that inflation is moving towards the Fed's 2% target, enabling it to start cutting interest rates.

He stated: "We are becoming more confident that inflation can be sustained at 2%, and when we do gain that confidence (which is coming), it will be appropriate to lower the restrictive interest rate levels."

Powell has sent a clear signal of a rate cut, and the market expects a shift towards a loose monetary policy, boosting investor confidence.

A new round of market movements is about to start, and U.S. stocks may face significant benefits, with major indices expected to continue setting new highs.

Is your investment strategy ready to embrace the rising wave?

Why do U.S. stocks continue to rise with higher expectations of rate hikes and cuts by the Fed?

The impact of the Fed's rate hikes and cuts on the U.S. stock market is not always unidirectional or linear, and market reactions are often influenced by a combination of factors.

Why do U.S. stocks rise when expectations of rate hikes and cuts are high?

When the Fed raises interest rates because of strong economic growth, a robust job market, and inflation close to the target level, the market believes that corporate profitability will improve, thereby pushing up stock prices.

If the market has fully digested and reflected the rate hike expectations in advance, when the actual rate hike is lower than expected or the market believes that the pace of future rate hikes will slow down, the stock market will rebound as a result.

Interest rate hikes by the Fed usually attract global capital to flow back to the United States, seeking higher-yielding dollar assets, including the stock market, which can push up U.S. stock prices.

Interest rate hikes mean that the Fed is confident in the economy, and this confidence is transmitted to the market, and investors may buy stocks because they are optimistic about the long-term prospects of companies.

The main reason for the rise in U.S. stocks when expectations of rate cuts are high is that rate cuts mean lower credit costs, encouraging investment and consumption, which is beneficial to economic growth.

At the same time, lowering interest rates helps to improve corporate profitability and market valuation, stimulating the stock market upward.

When the economy shows signs of weakness or faces uncertainty, the Fed's expectations of rate cuts are seen as a positive signal to combat the risk of recession, and the market expects policy stimulus to support the economy and corporate profits, thereby boosting the stock market.

Lower interest rates can release more liquidity into the financial market, especially during crises, and sufficient liquidity helps to stabilize market sentiment and promote the flow of funds into the stock market.

The stock market usually reacts to future expectations, and if the market expects rate cuts to prevent an economic downturn in time, then even if the current economic situation is poor, the stock market will rise due to expectations of future improvement.

In summary, the key reason why U.S. stocks can continue to rise with higher expectations of rate hikes or cuts is the market's understanding and expectations of the economic environment and potential impacts behind these policy adjustments, and how these policies are ultimately transmitted to the overall performance of enterprises and the market through various mechanisms.

It should be noted that market volatility is high, and investor behavior is complex.

The above explanation cannot cover all situations, and there are many other variables affecting the market trend in the actual situation.