Stock mania intensifies as S&P 500 closes above 5,000: Markets wrap

(Bloomberg) — Wall Street hit a milestone, with the S&P 500 surpassing the 5,000 mark amid a renewed rally in Big Tech companies and hopes the Federal Reserve will soon be able to lower interest rates — boosting expectations for corporate profits.

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Shares rose to close at an all-time high, capping a fifth straight week of gains. From its lowest levels recorded in March 2020 due to the pandemic, the American benchmark index more than doubled, driven by bets on a soft landing and the euphoria of artificial intelligence. In fact, Friday's advance was driven by the index's most influential group — technology — as the Nasdaq 100 rose 1%.

“The S&P 500 is the single best measure of confidence in the strength of American corporate earnings and the strength of the economy,” said George Ball, Chairman of Sanders Morris. “The trend of the S&P 500 reflects whether the economy and earnings are improving or deteriorating.”

Just days before the headline CPI was released, investors breathed a sigh of relief after a government report – which markets usually ignore – confirmed the progress of inflation at the end of 2023.

In the immediate aftermath of the data, Treasuries rose — but quickly reversed the move. The two-year yield has returned to levels seen since before the Fed's “pivot” in December. Atlanta Fed President Rafael Bostic said he was “very focused” on getting inflation back on target, and his Dallas counterpart Lori Logan said she saw no urgency to cut interest rates.

For David Donabedian, CIBC Private Wealth US, the current economic backdrop supports bullish momentum on Wall Street.

“The market has gone from believing that the Fed will be its savior to deciding that it does not need a savior with the economy supporting it,” Donabedian noted.

With the new S&P 500 hitting 5,000, the question is: What's next for the index?

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The metric has performed positively after reaching key milestones, according to Adam Turnquist of LPL Financial. He noted that of the last nine, the index posted an average 12-month return of 10.4% – with 78% of the events yielding positive outcomes.

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“A closure above this closely monitored level will undoubtedly create headlines and fuel the fear of losing sentiment,” Turnquist noted. “Aside from potentially boosting sentiment, round numbers like 5,000 often provide a psychological area of ​​support or resistance for the market.”

Right now, that's “just a big rough number,” according to Matt Maley of Miller Tabak + Co.

“Of course, if the market moves in any meaningful way from this level, that will change things,” he noted. “A failure at this level would make it a new major resistance level. Either way, the stock market has had a nice rally this year. So, unless any decline becomes significant, it won't mean much for the big picture.”

“While some will say it's just another number in the overwhelming sea of ​​numbers we absorb every day, this number is a little different,” said Kenny Polcari of SlateStone Wealth. “5,000 represents a new millennium, so it creates more excitement. So I expect the excitement to last a little longer.

Of course, another reason behind the strength of the stock market at the beginning of the year is the outlook for corporate earnings.

With earnings season about two-thirds over, companies are solidly beating expectations. About 80% of S&P 500 companies reported results This earnings cycle surprised to the upside, easily topping the 10-year average of 74%, according to Bloomberg Intelligence data as of Friday morning.

Analysts respond by raising expectations. Wall Street now expects fourth-quarter earnings to grow 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 1.2% forecast in early January, according to BI.

“The fourth-quarter earnings season was stronger than expected, giving investors confidence that a healthy economy can continue to drive corporate earnings,” said Arthur Hogan of B. Riley Wealth.

For Nationwide's Mark Hackett, the strong momentum has brought skeptical institutional and retail investors back into the market – which is having a ripple effect on the rise – although it is increasingly raising questions about sustainability.

In fact, despite all the optimism, warnings about an extended market continue to pile up – with the S&P 500 trading above “overbought” technical levels.

“We remain cautious,” said Dan Wantrupski of Janey Montgomery Scott. “On this front, we are observing narrowing breadth, persistent momentum divergences, overbought conditions in driving areas, and sentiment that could approach extremes relatively quickly.”

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With US stocks now trading at 21 times forward earnings amid rising interest rates and little demand for cheap hedges on the back of low volatility levels, bulls and bears are grappling over the sustainability of the rally, according to Jose Torres of Interactive Brokers.

“Are we entering a new era of higher valuations due to rising productivity, increased retail participation, and the shift of money from East to West?” Torres said. “Or is this a bubbling mania that will end in tears when wild speculation takes over the markets? In the end, only time will tell, but my intuition keeps me in the bear camp.”

The meteoric rise that sent U.S. stocks on a record wave is now close to triggering several sell signals, says Michael Hartnett of Bank of America Corp.

Hartnett wrote in a note that the bank's custom up-and-down index rose to 6.8 in the week ending February 7. A reading above 8 could indicate that the uptrend has gone too far, indicating a contrarian signal to sell, the strategist said.

“A bearish situation in 2023 has been the markets' best friend,” Hartnett said. But after investors bought the S&P 500 during last year's 24% rally, that exposure is “shifting from a tailwind to a headwind.” “In bubbles, markets show little respect for positioning,” or valuation, he warned. “They only respect politics and real interest rates,” he added.

Nationwide's Hackett said the stock market's strength despite changing Fed expectations and rising interest rates is notable given the sharp reactions to the Fed in recent years.

“A less emotional market is a positive sign, although investors should fight the complacency that is a natural reaction to such a strong and steady rise,” he added.

For eToro's Brett Kenwell, although stocks may be a bit overheated right now, that doesn't mean the markets are about to go off the rails.

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

The most prominent features of the company:

  • Cryptocurrency stocks rose as Bitcoin advanced above $47,000.

  • The CEO of New York Community Bancorp and other insiders bought more than 200,000 shares of the stock, which has lost about half its value since last week's shock announcement of a dividend cut and larger loan loss provisions.

  • Cisco Systems has decided to cut thousands of jobs, as the largest maker of computer networking equipment restructures its business to focus on high-growth areas, Reuters reported.

  • Expedia Group Inc. has appointed Ariane Goren is CEO of the online travel company, succeeding Peter Kern, who has held the position since 2020.

    • Separately, Expedia reported total bookings of $21.7 billion in the fourth quarter, missing analysts' average estimate of $22 billion.

  • PepsiCo Inc. gave Full-year sales forecasts fell short of analyst estimates and reported declines in Quaker Foods and Beverage unit volumes in North America.

  • ExxonMobil's exploratory drilling off the coast of Guyana will be “south” of the disputed area that Venezuela claims as its own, according to a senior company executive.

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Some key movements in the markets:

Stores

  • The S&P 500 rose 0.6% as of 4pm New York time

  • The Nasdaq 100 rose 1%.

  • The Dow Jones Industrial Average fell 0.1%

  • MSCI World Index rose 0.4%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • There was little change in the euro at $1.0787

  • The British pound rose 0.1 percent to $1.2630

  • There was little change in the Japanese yen at 149.29 to the dollar

Digital currencies

  • Bitcoin rose five percent to $47,581.03

  • Ethereum rose 2.8% to $2,492.76

Bonds

  • The yield on 10-year Treasury bonds rose two basis points to 4.18%.

  • The yield on German 10-year bonds rose three basis points to 2.38%.

  • The yield on British 10-year bonds rose four basis points to 4.09%.

Goods

  • West Texas Intermediate crude rose 0.4% to $76.55 a barrel

  • Gold in spot transactions fell 0.4 percent to $2,025.38 per ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Denitsa Tsikova, Alexandra Semenova, Julian Ponthus, Carmen Reineke, and Carly Wana.

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