S&P 500 keeps rising despite inflation and rate hike worries

In short: The S&P 500 has kept a long weekly winning streak even as inflation heats up and investors worry about possible interest rate increases.

What's going on

The S&P 500, a widely followed index of 500 large US companies, has been climbing for weeks. This is happening at the same time that inflation is picking up. Inflation means prices are rising, so each dollar buys a little less.

Normally, higher inflation leads investors to expect higher interest rates. Interest rates are the cost of borrowing money, like the interest on a mortgage or a credit card. When rates rise, stocks can look less attractive because future company profits are worth less in today’s dollars (like getting paid later instead of now).

One reason the market has held up is strong corporate earnings. Earnings are a company’s profits, and many companies have been reporting results that beat what analysts expected. When profits look solid and business still seems to be growing, investors sometimes keep buying stocks even if they think rate hikes could come later.

Another factor is how broad the rally is. A rise tends to be steadier when many different stocks are going up, not just a small group of the biggest companies.

What to watch

This kind of streak can continue, but it can also break quickly. Watch for inflation reports that come in higher than expected, which could push the Federal Reserve to raise rates faster. Also watch for signs that company profit margins are shrinking, meaning higher costs for wages, materials, or loans are eating into profits.

Source: NYTimes