S&P 500 Sets Record as Fed Rate-Hike Expectations Recede

The S&P 500, an index of 500 major US companies, closed at a record on August 13 as buying spread through technology names. The stated reason: expectations of further Federal Reserve rate hikes have receded. For readers in Asia, the significance is not American equities themselves but that this is the shared source of the same day's Japanese rally and the yen's muted response.

Lower expected funding costs favour companies whose profits sit far in the future, which is why the move concentrated in tech. The same expectation should erode the dollar's yield advantage and lift the yen — yet the yen barely moved, because the absolute rate gap still weighs on it. One expectation, three markets, three different answers.

Two practical points. If your portfolio holds both US tech and Japanese equities, the two are now driven by the same variable, so you are less diversified than you think. And rallies built on expectations reverse as quickly as data is released; a record high means the assumption is priced more fully, not that the floor is firmer.

Watch the next US inflation and payrolls reports, whether breadth improves beyond a handful of large tech names, and the direction of Treasury yields — bonds reprice rate expectations before stocks do.