"Most aggressive rate hike cycle in 40 years" seems like it never happened! US stocks have rebounded and the US dollar has also fallen.

Looking back at the point when the Federal Reserve paused its interest rate hikes in June, we can see a miraculous scene: the performance of the US stock market and the US dollar has hardly changed compared to the beginning of the interest rate cycle 22 years ago.

Time Travel of Stock Indexes Back to 15 Months Ago

As of the close of the US stock market on Friday, the S&P 500 index gained for five consecutive weeks, closing at 4409 points. When the Federal Reserve started this round of interest rate hikes 15 months ago, the S&P index closed at 4358 points. The current S&P 500 index is higher than it was on March 16, 2022, when interest rates were raised for the first time.

Generally speaking, the Federal Reserve's interest rate hikes tighten liquidity, which, although not a direct cause of a bear market, can lead to adjustments in the stock market. In 2022, the significant adjustment of the US stock market, especially technology stocks, can attest to this. After the interest rate hike in the spring, due to rising inflation and borrowing costs, US stocks were sold off and fell into a bear market, and predictions of an economic recession spread in the market.

However, in the first half of this year, driven by strong corporate earnings, US stocks rebounded significantly. Before entering the earnings season at the beginning of the year, Wall Street analysts had already significantly lowered their expectations. However, after companies successively released their earnings reports, strong performance offset pessimism.

According to FactSet data, as of the end of May, nearly 80% of US-listed companies exceeded first-quarter earnings expectations, a new high in two years.

In addition, driven by the ChatGPT craze, large technology stocks such as the "Big Seven" in the US stock market (Apple, Microsoft, Nvidia, Amazon, Meta, Tesla, and Google) continued to rise, driving the index up. In the first half of this year, the Nasdaq and S&P 500 indexes rebounded and successively entered a technical bull market.

At present, although Federal Reserve Chairman Powell still insists on being hawkish after the June interest rate meeting, the future path of monetary policy has a high degree of certainty, and the market generally expects that interest rate hikes are approaching the end, and the Fed's tightening stance can no longer suppress the upward momentum of the market.

According to Bloomberg, experts say that in the next 6-12 months, the importance of the Federal Reserve will decrease, and other global driving factors and fundamental factors will play a greater role.

In addition, according to Citigroup's model, since March, the impact of macro factors on the stock market has dropped from 83% to 71%, the largest three-month drop since 2009.

Synchronous Decline of the US Dollar Index

At the same time, the strength of the US dollar has also weakened, and the US dollar index is currently trading near its April 2022 level, down nearly 10% from its historical high.

The US dollar index, which measures the fluctuations of the US dollar against six major currencies, is more sensitive to interest rate policies and usually has a positive correlation with interest rate levels, that is, raising interest rates pushes the US dollar index up, and vice versa. This can be observed in the current 15-month, cumulative 500 basis point rate hike cycle. The Fed began raising interest rates in March 22, followed by four aggressive rate hikes of 75 basis points from June to September. The US dollar index rose from about 102 in early June to about 114 at the end of September, a cumulative increase of more than 11%. Other currencies suffered huge depreciation pressures during this period. It wasn't until the recent resolution of the debt ceiling crisis and the clear signal from the Fed to pause rate hikes that the US dollar index finally fell.

Currently, the market expects two more rate hikes of 25 basis points or one rate hike of 50 basis points by the end of this year. But the previously expected recession has not yet occurred, and the US economy seems to have withstood the impact of rate hikes, with a resilient labor market and mostly healthy corporate balance sheets. Bank of America's strategists have raised their outlook for the US stock market in their latest report and are becoming increasingly optimistic about the economic outlook. They predict that if there is an economic recession, it will be relatively mild.