S&P 500 extends on earlier gains, eyes 4600 mark as US session draws to a close

• The S&P 500 has built on earlier gains and is eyeing the 4600 level.
• The Nasdaq 100, though still lagging the S&P 500 and Dow, has seen an impressive recovery from lows.

US equities have continued to recover in the second half of the US session, with the recovery now more broad-based with tech and growth stocks joining the party despite continued elevation in yields. The S&P 500 index is now up by nearly 1.5% and is eyeing a test of the 4600 level. The Dow continues to lead and is now up closer to 2.0%. The Nasdaq 100, meanwhile, is up about 1.0%, meaning it has reversed more than 1.8% from prior session lows.

There haven't been any fresh fundamental catalysts to drive the extension of gains in the second half of the US session. Market participants continue to cite an easing of Omicron fears (cases in South Africa seem mild thus far) as supportive of the equity complex. As for the modest outperformance of value stocks versus growth on Monday amid sharp upside in US bond yields, market commentators have cited expectations that the Fed will announce an acceleration of its QE tapering at next week’s meeting, which should open the door to a swifter start to rate hikes.

Brian Pietrangelo, managing director of investment strategy at Key Private Bank explained to Reuters that there have been six periods since the 1990s marked by rising rates when value did better than growth. “Looking at those six different eras, generally speaking, value-oriented stocks performed better” he continued.  

Some cited Monday’s price action as evidence that the Santa rally was not yet dead. Over the weekend, top US infectious disease export Anthony Fauci said on CNN that it doesn’t look like Omicron has a “great degree of severity”. Traders also cited surprise 50bps reserve ratio requirement cut by the PBoC that will release as much as CNY 1.2T from the Chinese banking system as supportive to the global mood.

But analysts caution that high inflation in the US has removed a key pillar of support for equity markets; the idea of the Fed put. "By severely limiting the FOMC's ability to respond to downside risks posed by Omicron, inflation has effectively destroyed the Fed put” said analysts Jefferies. Ahead of this Friday’s key US Consumer Price Inflation report, analysts at the bank said that inflation is “now the dominant driver of not only rates but all risk assets”.