Wall Street is making a fresh dash upwards ahead of key central bank decisions, starting with the Fed on Wednesday. The softer-than-expected inflation report out of the US has injected renewed optimism, which was already building up from the positive headlines around China’s reopening and some impressive earnings from Oracle. But how sustainable is this latest rebound?

Dow Jones jumps back above 34,000

The Dow Jones has been outperforming the broader market for the last couple of months now and is making a fresh bid for the 34,000 level after its last attempt from two weeks ago failed.  The S&P 500 is also trying to make headways, spiking above its long-term descending trendline.

 

The catalyst for this bull charge was the weaker-than-expected prints in both the headline and core CPI rates in November, adding to the growing evidence that inflation in America has well and truly peaked. But it’s worth noting that there was already a hint of optimism to begin with this week despite all the central bank meetings and data releases on the agenda in the coming days.

The rebound in oil prices on the back of the damage to the Keystone pipeline that runs between Canada and the United States has lifted energy stocks, while increasing signs that China is on a sure path to exiting is zero-Covid policy are also shoring up spirits on Wall Street.

But it's highly questionable whether the positive mood can be sustained in a week where the Fed, ECB and Bank of England are all expected to hike interest rates again, with the former likely reiterating that there is a long way to go yet before inflation has been defeated. On top of that, the flash December PMIs due Friday could spread more gloom about business conditions in the major economies.

Nevertheless, investors seem convinced that inflation is on its way down and are unconcerned about the high probability of a recession in 2023 as long as the Fed starts cutting rates in the second half of the year.

Nasdaq’s upside momentum has its limitations

This belief has even buoyed the tech-heavy Nasdaq 100, which surged to a new three-month high of 12,166 on Tuesday following the CPI data, having badly lagged the Dow Jones and S&P 500 over the last couple of months. Prior to the latest bounce, tech stocks had not been able to find much solace in lower Treasury yields amid the persisting fears of Fed overtightening and a recession weighing on the earnings outlook.

But an upbeat set of earnings from Oracle, which on Monday announced a beat in both its revenue and earnings per share estimates for fiscal Q2, has reminded investors that the outlook may not be so dire after all. However, this notion will be put to the test on Thursday when Adobe reports its results for the three months to November.  There is a risk that Adobe’s updated guidance will spark concerns about slowing revenue growth in the upcoming quarters even if its actual results do not disappoint.

Adobe’s earnings could even be the final nail in the coffin for Nasdaq’s advances, which appear to be quickly running out of steam after hitting a wall at the descending trendline. An upside breakout for the Nasdaq will be additionally difficult if the Fed squashes any talk of an early dovish pivot and Friday’s flash PMIs send worrying signals about Europe’s and America’s growth prospects.