The S&P 500 finished above 4,500 mark for first time in 15 months as global stocks are on the way to record the biggest weekly rally since March. The S&P 500 is up over 2.5% so far this week. The rally happened due to colling of U.S. inflation and ebbing U.S. recessionary risks (read: Markets Anticipate Peaking Fed Rate Hikes: Growth ETFs to Gain).

Inside the Upbeat Mood

The U.S. Consumer Prices Index for the month of June brought about a welcome relief for investors, with prices rising at their slowest annual pace since March 2021. Core inflation, excluding volatile food and gas costs, increased 4.8% over the last year, falling slightly below economists' expectations.

The data sparked a debate over whether future Fed rate hikes will at all be steep and whether the peak of the policy tightening is nearing. Despite slower inflation growth, a 25-basis point interest rate hike in July is almost certain, given the sticky inflation and tightening labor market. However, the focus now shifts to the subsequent meetings and the potential for further rate increases.

The second positive point is while many Wall Street analysts were expecting a soft landing in the U.S. economy this year, the latest view is that “rolling recession’ is turning into ‘rolling expansion,’ per a top Wall Street economist, as quoted on MarketWatch (read: Time for Mid-Cap Value ETFs to Capitalize on "Rolling Expansion"?).

Can the Rally Last?

Some Analysts Are Still Cautious

Despite the rally, Goldman Sachs Group Inc. strategists are more skeptical, per Bloomberg, as quoted on Yahoo Finance. The team led by Christian Mueller-Glissmann “expects global equities to remain stuck in their ‘fat and flat’ range from here,” with a lower risk premium and relatively muted earnings growth limiting the potential for more gains.

Earnings Forecast to Fuel Stocks Ahead

The U.S. stock market witnessed an amazing rally in the first half of 2023, surpassing expectations and sparking optimism among investors. However, as the second-quarter earnings season begins, a growing chorus of Wall Street strategists, including Michael Wilson from Morgan Stanley (as quoted on Yahoo Finance), cautions about a changing investing backdrop.

Ripe equity valuations, high interest rates coupled with diminishing liquidity, are threats to the continuity of the rally. Given the prevailing edgy market conditions, investors will pay heed to the forward-looking guidance more in Q2.

More Rate Hikes are in the Cards

Rates are likely to remain higher for longer given a sticky inflation. Federal Reserve Governor Christopher Waller (per Bloomberg, quoted on Yahoo) expects the Fed will need to hike interest rates twice more this year to tame inflation down to its target, though more approving data on prices could avoid the necessity for the second hike. But we should not forget that inflation data are still above Fed's 2% target.

What Does Technical Analysis Say?

From a technical standpoint, the S&P 500 stood at 4,510.04 as on Jul 13, 2023, comfortably above its 50-day and 200-day moving averages of 4,276.89 and 4,026.23, respectively. The 50-day moving average is typically regarded as a short-term trendsetter, while the 200-day moving average is considered a long-term trend indicator.

The rise of the 50-day moving average above the 200-day moving average is known as a golden cross, which is a bullish sentiment. The index is currently trading at a 4.3% discount to its all-time high set in December 2021. This indicates muted expansion is possible in the S&P 500 from here.

ETFs in Focus

Against this backdrop, if you have faith in the S&P 500, investors may track S&P 500 ETFs likeInvesco S&P 500 Equal Weight ETF (RSP Quick QuoteRSP - Free Report) , Vanguard S&P 500 ETF (VOO Quick QuoteVOO - Free Report) , iShares Core S&P 500 ETF (IVV Quick QuoteIVV - Free Report) and SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) .