Investing.com — Despite a whirlwind of negative developments, U.S. stock markets continue to rise, leaving many wondering why stocks seem impervious to bad news.
Last week’s headlines provided plenty of reasons to send the market reeling, but the stock rose 1.11% to hit a new all-time high, with the index now up 21.91% this year.
According to analysts at Sevens Report, this resilience reflects a market that remains firmly anchored by two key beliefs: economic growth will remain stable and the Federal Reserve will cut interest rates – conditions that continue to support bullish sentiment despite growing risks.
The week got off to a shaky start as inflation data showed a rise in the consumer price index, marking the first increase this year.
Core inflation rose 3.3%, slightly above expectations, with price pressure spreading across multiple categories. While inflation is still on a downward trajectory, the firmer reading raised doubts about the size of future Fed rate cuts.
In addition, claims for unemployment benefits rose to summer highs, indicating some weakening in the labor market. “However, that number was inflated by the Boeing (NYSE:) strike and unemployment due to Hurricane Helene damage in Florida and North Carolina,” the analysts said.
Despite these warning signs, markets have dismissed concerns. Bank earnings provided a bright spot on Friday, with major financials like JPMorgan and Wells Fargo beating expectations, giving investors another reason to remain optimistic.
Even cautious commentary from consumer-facing companies like Domino’s Pizza (NYSE:) and Pepsi couldn’t dampen enthusiasm.
Meanwhile, geopolitical tensions in the Middle East — such as Israel’s impending response to an earlier Iranian missile attack — added to the uncertainty, but not enough to derail the meeting.
Sevens Report argues that part of the reason shares haven’t faltered is that the risks, while real, haven’t yet materialized in a way that calls into question the underlying narrative of a soft landing.
“The burden of proof remained squarely on the bears,” the analysts said. No negative development has been powerful enough to shift market sentiment away from expectations of stable growth and falling interest rates.
The market’s reaction suggests that investors are willing to rationalize bad news – whether inflation or weak labor market data – as temporary noise rather than evidence of a deeper economic downturn.
This continued optimism is also reflected in the Fed’s policy outlook.
Even as inflation has risen, Fed officials including John Williams reiterated that the most likely path forward involves an additional 50 basis points of rate cuts this year, rather than the more aggressive 75 basis points some investors had hoped for.
While these guidelines temper expectations, they are still in line with the broader narrative of gradual monetary easing, reinforcing the bullish outlook.
However, analysts at the Sevens Report warn that this steady rise comes with risks. Valuations in many sectors are too high, leaving little room for error if economic data weakens significantly.
There are already signs of weakening, with mixed consumer spending and shaky business investment raising questions about how long the growth story can last.
Moreover, geopolitical uncertainties and rising government bond yields could disrupt the rally if conditions deteriorate further.
The recent rise in Treasury yields, driven by inflation data and hawkish comments from the Fed, has pushed 10-year yields to multi-month highs. Although shares have so far shrugged off these rising rates, Sevens Report warns that rates cannot continue to rise indefinitely without eventually putting pressure on shares.
The dollar also strengthened, adding an extra layer of complexity as higher rates and a stronger currency could dampen corporate profits and weigh on market sentiment if they persist.
Still, the market’s resilience underlines a broader theme: Investors remain firmly committed to the idea that growth will remain intact, inflation will continue to cool and the Fed will provide enough policy support to avoid a hard landing.
As long as this belief holds, stocks are likely to continue their upward trajectory, even in the face of mixed economic signals.
Going forward, the focus will shift to growth-related data, with October retail sales and regional Fed surveys on the agenda.
These reports will be crucial in shaping the soft landing narrative that has kept markets buoyant. As consumer spending strengthens and business activity picks up, the bullish trend is likely to continue.
On the other hand, a sharp decline in these indicators could prompt a reevaluation of growth prospects – and ultimately introduce risks that investors have so far been able to easily ignore.
