Bloomberg Intelligence's 'Equity Market Minute' 1/13/2023

Gina Martin Adams discusses the bond market's growing comfort with the idea that the Federal Reserve may pause or pivot its monetary policy in 2023. She highlights the significance of the two-year Treasury yield crossing under the Fed funds rate, a reliable indicator of policy changes. However, she notes that stock valuations suggest markets are already anticipating this shift. The S&P 500 is trading at a high forward PE ratio, implying expectations of a significant drop in CPI by year-end. Given these factors, a moderate Fed policy shift may not significantly boost equities.

What is the implication of the S&P 500 trading above 17 times forward earnings?

What challenges are presented regarding the effectiveness of a moderate shift in Fed policy on equities?