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Fierce negotiations in Washington have led to a deal to raise US borrowing capacity without sending the stock market crashing as some on Wall Street had feared it might. But more risks may lie ahead.

Investors who spent much of the past month focusing on easing headlines related to the debt ceiling may have missed a major shift in expectations for the Federal Reserve’s monetary policy. Instead of expecting the Federal Reserve to raise interest rates again in June and make multiple rate cuts later this year, traders are currently anticipating at least one more rate hike when the Fed meets next month.

See. Debt ceiling deal. here’s what’s next as it passes a key hurdle in Congress

Recently, Dallas Fed President Lori Logan and other senior officials expressed concern that inflation is not slowing fast enough, which they say warrants more interest rate hikes.

Higher interest rates typically don’t make sense for stocks because they threaten high valuations, boosting the returns that investors can reap with far less risk by putting their money in Treasuries, money market funds or savings accounts.

So far, the shift hasn’t had much of an impact on high-flying tech stocks, which have fueled much of the rally in US stock indexes this year. Some on Wall Street believe that could change, as the Fed appears set to keep interest rates high until the markets’ expected decline arrives.

What other risks do markets face? Here are a few more that should be on investors’ radar.

A stronger dollar could spell trouble for stocks

The Fed’s rapid rate hikes in 2022 helped propel the U.S. dollar to a two-decade high back in September.

But as U.S. stocks have rebounded from last October’s lows, the dollar has retreated and the ICE U.S. Dollar Index has fallen more than 10% from its peak in late September to a low recorded in early February 2023.

Amid concerns about the US debt ceiling and talk of de-dollarization, the currency has begun clawing its way back. ICE US Dollar Index on Wednesday

DXY:

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A gauge of the dollar’s strength against major currencies rose to 104.63, its highest level since March 16, according to FactSet data.

Tom Essay, founder of Sevens Report Research and a former Merrill Lynch trader, warned clients that a resurgent dollar could threaten the stock market’s year-to-date gains. Megacap technology growth stocks, which have driven most of the market’s gains, are particularly vulnerable, he added.

“[D]The strength of the dollar typically has negative consequences for several asset classes, including the share prices of companies with high exposure to international sources of income and commodities,” Esaye said.

“And if the dollar continues to rise, as we currently expect it to, those various dollar-sensitive asset classes will begin to feel pressure from a rising dollar.”

Persistent inflation remains a problem

When the Fed made its 10th straight rate hike in May, raising its interest rate by 25 basis points, Chairman Jerome Powell suggested it could be the last of the cycle.

Most recently, a group of senior Fed officials pushed back, arguing that persistent service-sector inflation must settle before the Fed can declare victory.

On Tuesday, Richmond Fed President Thomas Barkin said inflation would not dissipate as quickly as consumers may have hoped.

See. Fed chief Barkin says inflation will be “more persistent than many might hope.”

Last Friday, the PCE index, the Fed’s preferred gauge of inflation, showed that prices of goods and services rose 0.4% in April, while the annual rate of price growth remained in the 4% to 5% range.

Market-based gauges weighing on prices are also rising, according to data from the St. Louis Fed: the five-year/five-year forward inflation expectation recently hit its highest level since November.

Stubborn inflation is cited by many Wall Street analysts as a potentially intractable problem for markets.

“While the prospect of a debt ceiling compromise this week is positive for risk sentiment and could support equities in the near term, we still think the risk-reward balance for broad US equities remains unfavorable amid other macro challenges,” said Mark Hefele. chief investment officer at UBS Global Wealth Management in a note emailed to clients and shared with MarketWatch.

The stable US labor market is often cited as one of the biggest obstacles to curbing inflation. Job growth has continued even as the Fed has raised interest rates by roughly 5 percentage points in a year.

The market will get another update on the state of the US labor market on Friday when the Labor Department releases its monthly jobs numbers.

Market leaders may throw in the towel

From Silicon Valley to Wall Street, economists, venture capitalists, and old-fashioned stock pickers have been talking about the AI ​​revolution and its potential to boost productivity and, by extension, corporate profits and economic growth.

The AI ​​craze has fueled the Nasdaq Composite, a market cap-weighted measure that includes all stocks traded on the Nasdaq exchange and the Nasdaq-100.

NDX:

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featuring only the top 100 Nasdaq stocks to recoup some of last year’s losses.

Some of last year’s worst-hit megacap stocks posted stunning gains. Chipmaker Nvidia Corp.

NVDA:

is up nearly 170% since Jan. 1, joining a small club of U.S.-traded stocks valued north of $1 trillion.

Its recent gains followed a blockbuster sales outlook as the company said it expects to sell $11 billion in goods in the quarter ending in June. That would be roughly 33% higher than the company’s previous quarterly sales record.

While both Apple Inc.

AAPL:

and Microsoft Corp.

MSFT:

are within a few percentage points of their record closing highs.

The market has relied heavily on megacap stocks to drive the rally in the S&P 500 index. A quick look at the Dow Jones Industrial Average, which is down more than 1% for the year, can quickly show the consequences for markets if companies like Google parent Alphabet Inc.

GOOG:

or Facebook parent Meta Platforms Inc.

AFTER:

must fall back under the weight of their high grades.

Skeptics like to point out that Nvidia Corp. is currently valued at about 50 times its expected earnings over the next 12 months, according to FactSet data. That’s down from a five-year high of 70.6 in 2021, but still too frothy compared to the S&P 500’s 18.3 EPS advance.

Some longtime market watchers warn that the artificial intelligence craze is beginning to resemble the dot-com days of 2000. Others note that megacap growth tech stocks are particularly sensitive to interest rate expectations, which could cause problems if inflation doesn’t pick up quickly. to weaken

“Technology has a turn-of-the-century smell. Then it was anything.com and the stock went up. Every company was an internet company. AI could be similar, as investors fall over themselves to acquire companies that are selling for huge valuations,” Paul Nolt of Murphy and Sylvest Wealth Management said in an emailed comment.

US stocks were lower on Wednesday, with the S&P 500

SPX:

fell 0.8% to 4,171 and the Nasdaq Composite

CONTACT:

decreased by 0.7% and made 12,932. Dow Jones Industrial Average

DJIA:

decreased by 0.9% to 32,753.

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