After the best week for the S&P 500 Index since November pushed the US stock gauge back toward its record levels of March, investors are faced with a call on whether the weakness seen earlier this month was only a blip or if delayed policy easing will pull the market back down again.

The answer, some investors say, lies in the market playbook of the 1990s, when equities more than tripled in value despite years of rates that were hovering around current levels. Back then, robust economic growth provided the platform for stocks to shine, and while the global outlook is more uncertain at this point in time, there still exists enough momentum to push the stock market forward.

“You have to assess why you could be in a scenario where there’s fewer rate cuts this year,” Zehrid Osmani, a Martin Currie fund manager, said in an interview. “If it’s related to an economy being healthier than expected, that could support the rally in equity markets after the typical volatile knee-jerk reactions.”

Prior to the gains of this past week, equities had been taking a breather throughout April after initial expectations of policy easing kick-started record-breaking rallies in US and European equity markets during the final months of 2023. 

Traders’ anticipation of at least six 25 basis-point Fed cuts this year at the beginning of January has since been pared back to only one as US inflation remains elevated, prompting concerns that prolonged restrictive policy would weigh on the economy and the earnings potential of companies.

Rising geopolitical risks and uncertainty over the outcome of global elections have also caused volatility to spike, driving demand for hedges that would offer protection in case the market sees a sharper rout.

Still, confidence in the global economy has strengthened this year, backed mainly by US growth and recent signs of a rebound in China. Similarly, the International Monetary Fund this month raised its forecast for global economic expansion while a Bloomberg survey shows that euro zone growth is expected to pick up from 2025.

While recent economic data reflected a sharp downshift in US economic growth last quarter, these figures should be “taken with a grain of salt” as they disguise otherwise resilient demand, said David Mazza, chief executive officer at Roundhill Investments.

“Net net, I’m still of the belief that we don’t need rate cuts to return to more bullish spirits, but I do think it’s going to be more of a grind,” Mazza said.

Some short-term pullback is seen as healthy for the S&P 500 after its rally to an all-time high in the first quarter. Between 1991 and 1998, the index retreated as much as 5% on several occasions before staging a new rally but didn’t correct by 10% or more, according to data compiled by Bloomberg.

One shortcoming of the comparison is that the index now has a far bigger concentration than in the 1990s.

The current top-five stocks  — Microsoft Corp., Apple Inc., Nvidia Corp., Amazon.com Inc. and Meta Platforms Inc. — are all from the tech sector and make up nearly a quarter of the market capitalization, leaving the index vulnerable to sharper swings.

Still, there are other factors that bode well for equities.

An analysis by BMO Capital Markets showed that S&P 500 returns tend to correlate with higher yields. Since 1990, the index has posted average annualized gains of almost 15% when the 10-year Treasury yield was above 6%, compared with a return of 7.7% when the yield was less than 4%, the analysis showed.

“This makes sense to us, since lower rates can be reflective of sluggish economic growth, and vice versa,” Brian Belski, BMO’s chief investment strategist, wrote in a note to clients.

In the past week, 10-year Treasury yields have touched a high for the year of 4.74% on the back of limited policy easing prospects.

Early results from the current reporting season suggest that about 81% of US companies are outperforming expectations even against a backdrop of elevated rates. First-quarter earnings are on track to increase by 4.7% from a year ago, compared with the pre-season estimate of 3.8%, according to data compiled by Bloomberg Intelligence.

Analysts expect S&P 500 profits to jump 8% in 2024 and 14% in 2025 after subdued growth last year, data compiled by BI show.

The earnings forecast could be even higher next year in the event of zero rate cuts in 2024, said Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management.

That “validates upside for equities,” given the market will look ahead to those projections, he told Bloomberg Television earlier this month.

A booming economy will continue to support stocks even in the absence of rate cuts, said Bank of America Corp. strategist Ohsung Kwon. The biggest danger to this premise will be if the economy slows while inflation remains elevated, he said.

“If inflation is sticky because of momentum in the economy, that’s not necessarily bad for stocks,” Kwon said. “But stagflation is.”