“Keeping the age-old adage in mind that ‘trees don’t grow to the sky,’ we think it’s important to keep the party hats in the box for now,” said John Stoltzfus of Oppenheimer Asset Management. “We remain positive on stocks, view bonds as complimentary to stocks for prudent diversification and look for a further broadening of the equity rally which emerged from the lows of late October.”
The S&P 500 lost steam as it approached 5,050. The Nasdaq 100 underperformed, with falls in Microsoft Corp., Apple Inc., and Tesla Inc. Arm Holdings Plc, a chip designer, jumped 29%. Nvidia Corp. momentarily surpassed Amazon.com Inc. in market capitalization. Treasury 10-year rates were slightly changed, at 4.17%. Bitcoin reached $50,000.
“Most people will be fixated on this week’s inflation numbers, but there’s also a potential tug-of-war between how extended the current market rally may be versus the buzz surrounding the S&P 500 topping 5,000,” said Chris Larkin, an analyst at Morgan Stanley’s E “While it’s true the S&P has often pushed higher after crossing ’round-number’ thresholds like this one, it hasn’t always done it after the type of rally that has unfolded since late October.”
The S&P 500 is facing a technical stumbling block after surpassing 5,000 for the first time, prompting a contrarian sell signal for equities on Friday, according to Piper Sandler’s Craig Johnson.
The 1981 hit from 38 Special summarises the present status of the equities market: “Hold on loosely, but don’t let go,” Johnson advised clients. “To be clear, we are not negative about the stock market. However, while ‘poor breadth’ persists, the market is due for a healthy correction, potentially ranging from 5% to 10%.”
The gauge’s rapid rise to 5,000 has already surpassed Bloomberg’s average Wall Street prediction for 2024, which was 4,819.40 as of Friday.
Because of the ancient saying that “large round numbers act like rusty doors and require several attempts before finally swinging open,” investors now question if it is time to take some profits, according to Sam.
If history is any indicator, while short-term digestions of gains have occurred, they have been quite brief, he stated.
When examining at the S&P 500’s cumulative return in the three, six, and twelve months after crossing over the 100, 500, 1,000, 2,000, 3,000, and 4,000 levels, the gauge reported average price increases of 4.7%, 9.8%, and 12.3%, respectively, and climbed in price during 83% of all periodic observations, Stovall stated.
This rally above 5,000 has been aided by fundamentals, with a gentle landing appearing increasingly likely and earnings season outperforming expectations following a rocky start,” said Jeffrey Buchbinder of LPL Financial. While the present valuation appears excessive, “it’s reasonable if the US economy avoids recession and earnings grow double-digits this year — which is not out of the question.”
According to Nicholas Colas of DataTrek Research, the S&P 500 is presently trading at about 20 times projected earnings, a level it has only reached twice in the previous 25 years: during the dot-com bubble and the post-pandemic bull market.
“Valuations reach these levels when investors have high confidence in three factors: monetary/fiscal policy, the US/global banking system, and strong corporate earnings,” Colas explained. “Even with 2022’s bear market, investors believe the future is highly predictable.” It will most likely need an external shock to sway their opinions.”
Rob Swanke of Commonwealth Financial Network believes that given the present valuation levels, some prudence is necessary.
“I wouldn’t say we’re in bubble territory, but the market is pricing closer to perfection now and companies will have to continue to hit high earnings targets in 2024, something they didn’t have to do in 2023,” he said.
Last week’s news and statistics reaffirmed the bull market’s four drivers: Fed rate reduction by May, good economic growth, ongoing disinflation, and high profitability, according to Tom Essaye of the Sevens Report.
“It’s important to acknowledge that this rally has been driven by actual good news and bullish expectations being reinforced by actual data,” Essaye said in a statement. “At the same time, the risks that kept investors worried in October (and even throughout 2023) haven’t been vanquished — they simply haven’t shown up yet.”
According to Bloomberg’s average projections, the annual CPI will fall to 2.9% in January, down from 3.4% the previous month. That would mark the first reading below 3% since March 2021.
According to a 22V Research survey, 51% of investors questioned believe the market reaction to CPI on Tuesday would be “risk-on” — with only 19% saying “risk-off”.
US consumer expectations for medium-term inflation plummeted to their lowest level since at least 2013, according to a Fed Bank New York survey released on Monday. Fed Governor Michelle Bowman reaffirmed that the central bank’s benchmark lending rate is in a solid position to keep inflation under control, and she sees no need to loosen policy soon. Thomas Barkin, President of the Federal Reserve Bank of Richmond, said it is premature to expect that inflationary pressures have subsided.
It’s critical not to lose sight of the broader picture, which is that ongoing disinflation should allow the central bank to begin easing this year,” said Mark Haefele of UBS Global Wealth Management. “This is a significant change in the investment landscape, so we think it’s less important whether the Fed cuts three, four, or five times this year.”
Even if the Fed does not lower interest rates, the S&P 500 might continue to rise this year, according to Savita Subramanian of Bank of America Corp.
“Remember that our constructive view on stocks is not based on what the Fed will do, but on what the Fed has already done,” she said, alluding to the central bank’s ability to control inflation without causing a recession.