Wall Street ended the week on a positive note, with stocks closing at all-time highs on speculation the Federal Reserve will start cutting rates this year — bolstering the outlook for Corporate America.
Another rally in the S&P 500’s most-influential group — technology — drove the gauge to a record for the first time in two years. Fueled by hopes the artificial-intelligence boom will keep powering the market higher, the benchmark topped 4,800 — defying warnings that the rally remains concentrated in a narrower group of shares.
Equities pushed higher on Friday as a drop in Treasury volatility continued to bode well for risk-taking on Wall Street. Also helping sentiment somewhat was a report seen by many as “Fed-friendly,” showing a mix of high consumer confidence and lower inflation expectations.
“After a more than two-year wait, the stock market hit a new record high,” said Greg McBride at Bankrate. “Easing inflation pressures and the prospect of both lower interest rates and a soft economic landing have stoked investors’ appetite for risk.”
The S&P 500 added 1.2%, erasing this week’s losses. The tech-heavy Nasdaq 100 outperformed, with Advanced Micro Devices Inc. hitting a record and Nvidia Corp. leading megacaps higher. Treasury 10-year yields were little changed. The dollar fell.
“Much more good than bad news in the underlying economic data as we enter 2024, with inflation cooling,” said Art Hogan at B Riley Wealth. “We’re seeing a plausible path to inflation continuing to ease gradually, an end to Fed rate hikes, and a re-acceleration of economic growth in the back half of 2024.”
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After hitting a low in October 2022, the S&P 500 has surged about 35% and topped its previous closing high of 4,796.56 on Friday. The gauge became the last of the three major US equity benchmarks to close at a record.
And if history is any guide, there’s potential for further gains ahead.
The gauge went 512 trading days without a record through Thursday, which ranks as the sixth-longest streak since 1928, according to Ned Davis Research. One year after hitting new highs, the index has risen 13 out of 14 times by a median of 13% in that span.
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“The equity market’s path of least resistance seems to be higher until the consumer pulls back and/or the labor market buckles,” said Nicholas Bohnsack at Strategas. “In the absence of a ‘soft patch’ we remain positive on the equity market having increased exposure to stocks into year-end but suspicious the same mix that led the market last year, i.e., the ‘Magnificent 7’ will continue to carry the day.”
The same group of companies that led a stellar run in stocks last year is once again on the driver’s seat in 2024. So far in January, Nvidia, Microsoft Corp. and Meta Platforms Inc. — all part of the “Magnificent Seven” cohort — are the biggest point gainers in the S&P 500. Meta shares also closed at a record as the Facebook parent fully recovers from a selloff that at one point had erased more than three-fourths of its value.
Meantime, semiconductor shares got a boost this week from a bullish forecast Taiwan Semiconductor Manufacturing Co.
“Despite concerns regarding the Fed’s timetable for initiating rate cuts, and the possibility of Treasury needing to increase its funding requirements, markets — once again — rewarded mega technology as the promise of generative AI increasingly becomes a reality,” said Quincy Krosby at LPL Financial.
Investors are reverting to owning growth, technology, the “AI bubble” as the 10-year Treasury yield settles in a range of 3.75% to 4.25%, according to Bank of America Corp.’s Michael Hartnett.
While US shares saw redemptions at US$4.3 billion in the week through Jan. 17, tech-stock funds saw the biggest two-week inflow since August at US$4 billion, BofA said, citing EPFR Global data.
“Bottom line, we’re off the bullish boil and the boat is less full, but it’s still leaning firmly positive,” said Peter Boockvar, author of the Boock Report.
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After being caught flat-footed early last year, fund managers have gone all-in on technology stocks — so much so that it’s sparking warnings that the Nasdaq 100 is looking ever more vulnerable to investor pullbacks.
Hedge funds hold the highest level of net-long Nasdaq 100 futures in nearly seven years, according to Societe Generale’s weighted analysis of data on the Nasdaq 100 Index futures and e-mini contracts provided by the Commodities Futures Trading Commission. Meanwhile, a global fund manager survey from Bank of America this month showed the most crowded trade is being long the so-called Magnificent Seven stocks and other tech-related growth shares as a way to play the prospect of Fed easing.
“Based on the recent price action, Nasdaq 100 traders don’t seem particularly concerned about the upcoming earnings reports,” said Matthew Weller at Forex.com and City Index. Now, with the “Magnificent Seven” stocks collectively trading at an “eye-watering” valuation, “the only thing that could drag down the Nasdaq 100 may be poor earnings results,” he noted.
While narrow areas of US equity markets are dazzling investors with new highs, such action continues to mask a widening divergence underneath the surface that speaks of ongoing “technical disease,” according to Dan Wantrobski at Janney Montgomery Scott.
“Narrow leadership such as this is a throwback to last year (mega-cap/AI/Mag 7), and our belief is that if it persists, it will trigger a wider bout of volatility not too far down the road,” Wantrobski added.
The combination of better-than-expected growth and a meaningful improvement in inflation — which gives the Fed flexibility to cut interest rates — is giving UBS’s Chief Investment Office greater conviction in its base case for an economic soft landing. While this benign outcome is mostly priced into equity markets, market gains can extend a bit further, the firm notes.
“Our June and December S&P 500 price targets are 4,900 and 5,000, respectively,” said David Lefkowitz at UBS Global Wealth Management. “We maintain a neutral preference for US equities in our tactical asset allocation. With S&P 500 valuations full, in our view, we look for a pickup in earnings growth to be the primary driver of the somewhat modest upside that we expect.”
A double-digit stock rally led by megacaps in 2023 means an ever-enlarging chunk of the benchmark index is acutely tied to long-term earnings prospects — and hence more sensitive to rising yields.
With inflation concerns lingering, positive stock-bond correlations have firmed back up. The 60-day correlation between the S&P 500 and benchmark Treasuries turned positive again and has threatened bonds’ hedging role since August of last year.
“The good news is the market has done a decent job of working off some of the extremes in price and sentiment through a correction in time and through churning, as opposed to intense selling pressure,” said Keith Lerner at Truist Advisory Services. “Economic, earnings, and credit trends continue to show resilience.”
“Valuations have been driven higher by three main factors: avoiding a recession in 2023, a Federal Reserve pivot lowering borrowing costs, and higher earnings expectations for 2024,” said Rob Swanke at Commonwealth Financial Network. “Still, interest rates are much higher than at the beginning of 2022 and earnings expectations for 2024 are already high,” he noted, “so expectations should be tempered.”
Traders also kept a close eye on remarks from policymakers, who spoke just hours before the Fed’s traditional pre-meeting communications blackout period. Three Fed officials on Friday emphasized that incoming data will guide their decision on when to cut interest rates, and made clear they haven’t seen enough evidence yet to begin easing.
Fed Bank of Chicago President Austan Goolsbee said a continued decline in inflation would merit discussion of reducing rates, though he stressed the central bank will make decisions meeting-by-meeting. His Atlanta counterpart Raphael Bostic said he’s open to changing his views on the timing of cuts depending on the data, though he wants to be sure inflation is “well” on the way to the 2% goal before easing policy. San Francisco Fed chief Mary Daly said it’s far too early to declare victory on inflation.
Markets are overpricing the pace and amount of Fed-rate cuts as they are overlooking stubbornly high inflation, according to economist Mohamed El-Erian.
“I do think that we get to the pivot, but relative to what the market expects, it won’t be as fast or as deep,” said El-Erian, president of Queens’ College, Cambridge, and a Bloomberg Opinion columnist.
Traders have tempered their wagers on rate cuts as US economic data continued to show resilience and Fed officials emphasized they want to ensure inflation is tamed before embarking on any cuts. Markets are now pricing in about 1.4 percentage points of reductions this year, compared with expectations of as much as 1.7 percentage points of easing as recently as last week.
