A rally in several large technology companies drove stocks to all-time highs, with some prominent Wall Street strategists rushing to boost their targets even as many hedge funds grow increasingly cautious.
The S&P 500 hit its 30th record this year, defying concerns about narrow breadth that could make the market more vulnerable to surprises. As traders geared up for retail-sales data and a slew of Federal Reserve speakers, Treasuries fell amid a flurry of high-grade corporate bond sales that exceeded $21 billion, led by Home Depot Inc. That’s ahead of Wednesday’s holiday.
Optimism over a resilient economy, improving corporate earnings and the potential start of rate cuts have pushed equities up about 15% this year, with ebbing inflation and the artificial-intelligence fervor also propeling equities higher.
“We believe the S&P 500 can reach 6,000 by year-end as the combination of better earnings and one or two rate cuts is like a turbo booster for stock prices,” said James Demmert at Main Street Research. “The Fed may not need to cut rates this year — but if they do, it will be even more bullish for equities, particularly tech.”
The S&P 500 topped 5,470, with Tesla Inc. and Apple Inc. leading gains in megacaps. Nvidia Corp. edged lower. The Nasdaq 100 came closer to the 20,000 mark. Micron Technology Inc. rose to a record as some firms raised their targets. Broadcom Inc. jumped over 5%. Activist investor Starboard Value said it’s built a stake in Autodesk Inc. valued at more than $500 million.
French stocks rebounded after last week’s tumble. Yet the Stoxx Europe 600 Index was little changed as Citigroup Inc. downgraded the region’s equities, citing “heightened political risks” among other reasons.
Gains in the shares of American technology giants are likely to keep pushing the S&P 500 to new highs, says Citigroup Inc.’s Scott Chronert.
The bank’s US equity strategist boosted his year-end forecast for the stock benchmark on Monday, to 5,600 from 5,100. He cited continued strength in the so-called Magnificent Seven stocks and expectations for earnings growth to extend to other S&P 500 companies.
Citigroup is the third firm since Friday’s close to lift its forecast for the gauge, joining Goldman Sachs Group Inc. and Evercore ISI as US stocks keep climbing to records.
Meantime, hedge funds decreased their long-short gross leverage, which measures their overall exposure to the market, by the most since March 2022, according to a note from Goldman Sachs’s prime brokerage desk.
While there’s been no shortage of headlines about the latest record highs on the S&P 500, the highs have been less significant as a sign of market strength than as an influence on investor sentiment, according to Tim Hayes at Ned Davis Research.
“As record highs were reached by major benchmarks, breadth has weakened,” he said. “Benchmark records are not confirmed by most markets, sectors and stocks.”
In the run-up to the latest reading on retail sales, traders also kept an eye on Fedspeak.
Fed Bank of Philadelphia President Patrick Harker said he sees one rate cut as appropriate for this year based on his current forecast, underscoring the message that high rates are likely to persist.
Investors are being warned that rates will stay higher for longer than they’d expected, with the median projection from Fed officials calling for one rate cut this year. And yet cash is pouring into stocks that benefit from lower borrowing costs.
The question now for investors is what will the market do when the Fed eventually does decide to cut? Historically, rate cuts have marked a key inflection point that has ushered in strong equity returns — but only for cycles that aren’t triggered by a recession, like this one.
“Improving inflation trends would lead to a more constructive policy outlook, which should be a tailwind for equities and fixed income,” said Jason Pride and Michael Reynolds at Glenmede. “Assuming all continues to go well with inflation along a moderating path through the summer, a September rate cut is likely on the table.”
Some stock-market optimists have speculated that a swath of the roughly $6 trillion sitting in money-market cash is poised to be reallocated into equities and will give the rally another boost.
But a growing number of soothsayers at firms ranging from Morgan Stanley to Deutsche Bank AG are poking holes in that theory. With generous yields on cash amid elevated interest rates, it’s no surprise that inflows to money market funds just hit another all-time high. Yet, there’s little evidence to suggest that cash is going to move into riskier assets anytime soon.
“Choppiness and a flight to quality are likely to dominate the markets until the Fed clarifies the scope and timing of rate cuts,” said Robert Teeter at Silvercrest Asset Management. “This guidance may come as early as the Jackson Hole event in August.”
Many stocks are now becoming more sensitive to softer growth conditions, according to Morgan Stanley strategists led by Michael Wilson. They say some value/cyclical stocks have started to focus more on earnings expectations and less on the impact of interest rates.
“This development is in line with our consistent view that higher rates are a clear headwind to small caps, but lower rates don’t offer a comparable benefit,” they wrote.
The correlation between stock prices and bond yields continues to invert and is the most negative since 1997, according to according to Bloomberg Intelligence strategists led by Gina Martin Adams. That suggests a major shift in the inflation regime is likely underway and that stock prices and bond yields may together remain subject to extreme sensitivity to inflation trends.
“The correlation between the two asset classes was positive for the better part of 20 years, suggesting disinflation was the dominant regime,” they said. “The positive correlation historically implied that equities trended in the direction of yields as inflation mostly coincided with growth.”
The shift in the correlation to negative might be signaling a significant longer-term change in inflation conditions has begun, the BI strategists noted. Stocks held a negative correlation to yields throughout most of the 1980s and 1990s, when inflation hurt equities.
Read the full article here.
This article also appeared on Yahoo! Finance.
Disclosures: Main Street Research LLC (“MSR”) is an SEC registered investment adviser; however, this does not imply any level of skill or training, and no inference of such should be made. The opinions expressed herein are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. We provide historical content for transparency purposes only. All opinions are subject to change without notice and, due to changes in the market or economic conditions, may not necessarily come to pass. Mention of a security should not be considered a recommendation or solicitation to purchase or sell the security, and any securities mentioned may be held by MSR for client portfolios. The information posted represents an opinion as of the date published and should not be considered an investment recommendation. MSR does not become a fiduciary to any reader or other person or entity by the person’s use of or access to the material. The reader assumes the responsibility of evaluating the merits and risks associated with the use of any information or other content and for any decisions based on such content. Investment disclosure —neither the information nor any opinion expressed herein constitutes a solicitation by main street of the purchase or sale of any securities or other financial instruments nor a recommendation to hold, sell, buy, or own a particular security or sector in your portfolio and do not represent all securities purchased, sold or recommended for client accounts. The listener should not assume that an investment in these securities has been or will be profitable. Individual recommendations are tailored to individual portfolios. Main street client portfolios are managed separately and vary in regard to risk and return dependent upon individual client circumstances. A full list of all securities in the MSR client portfolio is available upon request.
