By Lewis Krauskopf

NEW YORK, (Reuters) – As the astonishing rebound in U.S. stock prices continues, investors question whether the surge will continue in spite of a hawkish Federal Reserve and warnings from the bond markets about a recession.

It is now up 11% from March 8th, and has seen its highest 15-day percentage gains since June 2020. The main reason for this increase was many high growth stocks that were beaten hard over the past year. Following a loss of 12.5%, the benchmark index’s losses for 2018 have been cut to 2.8%.

This is despite many concerns, including the conflict in Ukraine, rising inflation, and sharp increases in Treasury yields, fueled by Fed tightening of monetary policy.

Stocks reacted positively to Tuesday’s latest alarming sign from the bond markets. The S&P 500 closed up 1.2% even as the widely tracked U.S. 2-year/10-year Treasury yield curve inverted for the first time since September 2019, a phenomenon that has reliably predicted past recessions.

Jack Ablin (Cresset Capital Management’s chief investment officer) said, “It has been mysterious.” “I believe that the equity market and bond markets are both sober.”

Investors point to many factors that may be driving this bounce in equity prices.

Many took comfort in the assessment by Fed Chairman Jerome Powell of America’s economy being strong enough to withstand a rapid pace of rate rises. Analysts speculate that they may also be cheering on a Fed now attempting to tackle skyrocketing inflation.

The S&P 500 has gained over 6% since the Fed’s March 16 monetary policy meeting, at which it raised interest rates by 25 basis points and penciled in 150 basis points of tightening for the rest of the year.

J. Bryant Evans (investment advisor, portfolio manager, Cozad Asset Management) stated that while stock investors are fond of low interest rates they do not love inflationary conditions that spiral out of control.

In a report, Goldman Sachs analysts (NYSE:) stated that institutional investors have driven up stock prices in recent weeks as they unwind “short” bets on equities.

According to the bank, however, some investors were using stock weakness as an opportunity buy stocks.

Goldman estimates that $93 billion has been poured into U.S. equity fund funds in the past year. This “suggests that American households continue to purchase after 2021’s record-breaking year of U.S equity inflows.”

Stocks have seen a lot of gains in recent years, despite bond yields rising higher this year, which has caused many to flee from high-growth stocks. These are the meme stock darlings GameStop, AMC Entertainment, (NYSE::) Holdings, whose shares have nearly doubled from 2022’s lows. Cathie Wood’s ARK Innovation ETF has risen 36.5% since its low.

Yardeni Research strategist Ed Yardeni said that March 8 could have been a low point for the stock exchange this year. He believes stocks are getting support from investors who use equities to hedge against inflation. This is its highest level in almost four decades.

On Tuesday, he said that “the fog of war had obscured our outlook”, but that the bull market long-term, punctuated at times by panic attacks, is still intact.”

Even though higher prices for energy and other commodities threaten profit margins, the outlook on corporate earnings remains strong. Estimates for S&P 500 profits have risen since the start of the year with companies overall expected to increase earnings by 8.8% in 2022, according to Refinitiv IBES.

Matthew Miskin, John Hancock Investment Management’s co-chief investment strategist said that while stocks fell, earnings estimates just kept increasing. The economic outlook and earnings are still favorable, so investors hesitate to unload stocks.

Strategists from JPMorgan (NYSE) suggested that investors may have been rebalancing their portfolios in the fourth quarter. They wrote that portfolio rebalancing by investors “likely played an important role in the last two weeks, hurting bond and supporting equities.”

Investors are skeptical of the rebound. Neuberger Berman stated Monday that it would “fade equity rallies”.

Erik Knutzen (chief investment officer for multi-asset classes at Neuberger) stated in a written comment that high inflation, rising rates, and slowing growth are potentially dangerous combinations for equity investors.

Robert Pavlik is a senior portfolio manager for Dakota Wealth Management. He stated that he had slightly more cash than usual in his client portfolios.

Pavlik expressed concern that there could be a rally in bear markets that turns around, and that it could lead to new lows.