S&P 500 Surpasses 5,000 Milestone as Tech Rally Boosts Wall Street
Wall Street reached a significant milestone as the S&P 500 index surpassed the 5,000 mark, driven by a renewed rally in big tech stocks and optimism surrounding potential rate cuts by the Federal Reserve. This achievement marks another all-time high for equities, capping off a fifth consecutive week of gains. Since its pandemic-low in March 2020, the S&P 500 has more than doubled, fueled by the excitement surrounding artificial intelligence and bets on a soft landing for the economy.
The recent surge in the stock market was largely propelled by the technology sector, with the Nasdaq 100 index rising by 1%. According to George Ball, chairman of Sanders Morris, the S&P 500 serves as a barometer of confidence in Corporate America’s earnings power and the overall strength of the economy. The direction of the index reflects whether the economy and earnings are improving or deteriorating.
Investors breathed a sigh of relief ahead of the release of the key consumer price index, as a government report confirmed progress in inflation at the end of 2023. Although Treasuries initially rose in response to the data, they quickly reversed that move. The two-year yield returned to levels seen before the Federal Reserve’s December “pivot.” Federal Reserve Bank of Atlanta President Raphael Bostic expressed his focus on returning inflation to target, while his Dallas counterpart Lorie Logan stated that she sees no urgency to cut rates.
David Donabedian at CIBC Private Wealth US believes that the current economic backdrop supports Wall Street’s bullish momentum. He noted that the market has shifted from relying on the Federal Reserve as its savior to recognizing that it doesn’t need one, given the strong support from the economy.
With the S&P 500 surpassing the 5,000-point milestone, investors are left wondering what’s next for the index. According to Adam Turnquist at LPL Financial, historical performance after reaching major milestones has been positive. Of the last nine milestones, the index posted an average 12-month return of 10.4%, with 78% of occurrences producing positive results. Turnquist noted that a close above this closely watched level will undoubtedly create headlines and further fuel the fear of missing out emotions. Round numbers such as 5,000 often provide a psychological area of support or resistance for the market.
Matt Maley at Miller Tabak + Co. sees the current milestone as “just a big round number” and believes that its significance will depend on whether the market experiences a meaningful decline from this level. If the market rolls over significantly, it could become a new key resistance level. However, Maley acknowledges that the stock market has seen a fabulous rally this year, and unless any decline becomes substantial, it won’t have a significant impact on the big picture.
Kenny Polcari at SlateStone Wealth recognizes that while some may view 5,000 as just another number, it represents a new millennium and creates additional excitement. He expects the excitement to continue for a bit longer.
One of the reasons behind the stock market’s strength at the start of the year is the outlook for corporate profits. With earnings season around two-thirds complete, companies are consistently beating expectations. Bloomberg Intelligence data shows that 80% of S&P 500 companies reporting results this earnings cycle have surprised to the upside, exceeding the 10-year average of 74%. Analysts are responding by raising their projections. Wall Street now anticipates fourth-quarter earnings to grow by 6.5% from a year earlier for S&P 500 members on average, which would be the best since mid-2022. This projection is a significant improvement from the meager 1.2% estimate in early January.
Arthur Hogan at B. Riley Wealth believes that the stronger-than-expected fourth-quarter earnings season gives investors confidence in the potential for continued corporate profit growth, driven by a healthy economy.
The strong momentum in the stock market has attracted skeptical institutional and retail investors back into the market, according to Mark Hackett at Nationwide. This influx of investors has a compounding effect on the rally, but it also raises questions about the sustainability of this upward trend.
Despite the optimism, warnings about a stretched market continue to accumulate, with the S&P 500 trading above “overbought” technical levels. Dan Wantrobski at Janney Montgomery Scott remains cautious, pointing out narrowing breadth, ongoing divergences in momentum, overbought conditions in leadership areas, and sentiment that can quickly reach extremes.
Jose Torres at Interactive Brokers highlights the ongoing debate between bulls and bears over the sustainability of this rally. With US equities trading at 21 times forward earnings, lofty interest rates, and little demand for cheap hedges due to low volatility levels, the question arises: Are we entering a new era of higher valuations driven by rising productivity and increased retail participation? Or is this