S&P 500 Closes Above 5,000

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.

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.

“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.

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