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Portfolio > Economy & Markets > Stocks

S&P 500 Closes Above 5,000

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What You Need to Know

  • Bets that disinflation will tilt the Fed toward a rate cut are helping to fuel gains, combined with signs of economic strength.
  • Another reason sustaining the stock market’s strength to start the year is the outlook for corporate profits.
  • Stocks may be a bit overheated at the moment, but that doesn’t mean the markets are about to go off the rails, says Bret Kenwell at eToro.

Wall Street notched a milestone, with the S&P 500 topping 5,000 amid a renewed rally in big tech and hopes the Federal Reserve will soon be able to cut rates — bolstering the outlook for corporate profits.

Just as Americans get ready for football’s biggest night — with tickets for Sunday’s Super Bowl setting fresh records — U.S. stocks scored a victory of their own to hit another all-time high. Emboldened by bets on a soft landing and the power of artificial-intelligence — equities continued to push forward, defying doomsayers and warnings about an overstretched market.

“The S&P 500 is the best single barometer of confidence in Corporate America’s earnings power and the strength of the economy,” said George Ball, chairman of Sanders Morris. “The direction of the S&P 500 reflects whether the economy and earnings are improving or deteriorating.”

A few days ahead of the key consumer price index, investors breathed a sigh of relief as a government report — which is usually ignored by markets — confirmed inflation progress at end of 2023.

In the immediate aftermath of the data, Treasuries rose — but quickly reversed that move. The two-year yield went back to levels seen since before the Fed’s December “pivot.” Fed Bank of Atlanta President Raphael Bostic said he’s “laser focused” on returning inflation to target, and his Dallas counterpart Lorie Logan said she sees no urgency to cut rates

S&P 500 Hits 5,000 | Stocks trade at all-time highs

In the immediate aftermath of the data, Treasuries rose — but quickly reversed that move and pushed lower.

The two-year yield went back to levels seen since before the Fed’s December “pivot.” Focus is now shifting to Tuesday’s inflation reading after buyers snapped up more than $120 billion of bond issuance this week.

To David Donabedian at CIBC Private Wealth U.S., the current economic backdrop supports Wall Street’s bullish momentum.

“The market has pivoted from believing the Fed would be its savior to deciding it doesn’t need a savior with the economy supporting it,” Donabedian noted.

With the S&P 500′s new 5,000-point milestone, the question is: What’s next for the index?

Performance for the gauge has been positive after reaching major milestones, according to Adam Turnquist at LPL Financial. Of the last nine, the index posted a 12-month average return of 10.4% — with 78% of occurrences producing positive results, he noted.

“A close above this closely watched level will undoubtedly create headlines and further feed fear of missing out emotions,” Turnquist noted. “Outside of a potential sentiment boost, round numbers such as 5,000 often provide a psychological area of support or resistance for the market.”

For now, that’s “just a big round number,” according to Matt Maley at Miller Tabak + Co.

“Of course, if the market rolls over in any meaningful way from this level, that will change things,” he noted. “A failure at that level would make it a new key resistance level. Either way, the stock market has seen a fabulous rally this year. So unless any decline becomes a substantial one, it won’t mean a whole lot for the big picture.”

“While some will say it is just another number in the vast sea of numbers that we digest every day, this one is a bit different,” said Kenny Polcari at SlateStone Wealth. “5,000 represents a new millennium, and so it does create additional excitement. So I would expect the excitement to continue for a bit more.”

Another reason sustaining the stock market’s strength to start the year is certainly the outlook for corporate profits.

With earnings season around two-thirds done, companies are solidly beating expectations. Some 80% of S&P 500 companies reporting results this earnings cycle have surprised to the upside, handily exceeding the 10-year average of 74%, according to Bloomberg Intelligence data through Friday morning.

Analysts are responding by lifting projections. Wall Street now sees fourth-quarter earnings growing 6.5% from a year earlier for S&P 500 members on average — which would be the best since mid-2022 — and up from a meager projection of 1.2% in early January, according to BI.

“The fourth-quarter earnings season has been stronger than expected, giving investors confidence that the healthy economy could continue driving corporate profits,” said Arthur Hogan at B. Riley Wealth.

Earnings Growing at Fastest Clip Since 2022 |

Still, despite all the optimism, warnings about a stretched market keep piling, with the S&P 500 trading above “overbought” technical levels.

“We remain cautious,” said Dan Wantrobski at Janney Montgomery Scott. “On this front, we note narrowing of breadth, ongoing divergences in momentum, overbought conditions in leadership areas, and sentiment that can approach extremes relatively quickly.”

Michael Hartnett at Bank of America Corp. says that a speedy rally that sent U.S. stocks on a record-setting spree is now close to triggering several sell signals.

The bank’s custom bull-and-bear indicator rose to 6.8 in the week through Feb. 7, Hartnett wrote in a note. A reading above 8 would suggest the bullish trend has run too far, flashing a contrarian signal to sell, the strategist said.

“Bear positioning in 2023 was markets’ best friend,” Hartnett said. But after investors bought the S&P 500 during last year’s 24% rally, that exposure is “flipping from tailwind to headwind.”

He cautioned that “in bubbles, markets show little respect for positioning,” or for valuation. “They solely respect policy and real interest rates,” he said.

To Bret Kenwell at eToro, while stocks may be a bit overheated at the moment, it doesn’t mean the markets are about to go off the rails.

“While it may eventually lead to some profit taking in the short term, this is still a bull market. Until we see material weakness in the economy, it’s hard to get bearish on stocks,” Kenwell noted.

Overbought Territory

“Despite some concerns about banks tightening lending standards recently, the U.S. economy still looks to be attempting a soft landing,” said Don Rissmiller at Strategas. With inflation remaining tame, “Fed rate cuts are likely later in 2024,” he added.

Market-implied expectations for Fed rate cuts this year continued to price in a quarter-point move in June and a total of four this year. Next week, consumer-price index data for January is anticipated to show further slowing, which Fed officials have said is a condition for pivoting to cuts after 11 rate increases over the past two years.

Expectations for a heavy slate of new corporate bonds concentrated on Monday — ahead of the January CPI data — was another factor for Treasury yields to push higher Friday.

To Krishna Guha at Evercore, the U.S. CPI revisions presented “no ugly surprises,” which should add to the Fed’s confidence that inflation is heading sustainably back to the 2% target — and ticking one more box on the road to rate cuts.

Credit: Adobe Stock

 

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