Wall Street traders gearing up for Wednesday’s Federal Reserve decision sent stocks to fresh all-time highs amid gains in a handful of big techs.

Equities erased losses after a rebound in the “Magnificent Seven” cohort of tech megacaps — dubbed the “most-crowded trade” by Bank of America Corp. Nvidia Corp. rose on bets its new chips will fuel a rally that’s already added US$1 trillion to the company’s value this year. Bonds also gained after a rout that saw traders pushing back their timetable for rate cuts.

Investors should buy the dip in stocks in the case of pullbacks amid a backdrop of good economic growth and inflation normalization, according to Goldman Sachs Group Inc. strategists led by Christian Mueller-Glissmann.

“While equity momentum has somewhat supported broader risk appetite, we see limited implications of a continued reversal barring a material U.S. rate shock,” they said.

The S&P 500 climbed to around 5,180 — though volume was well below the past month average. Treasuries pushed higher, with a $13 billion sale of 20-year bonds drawing strong demand. The yen slid as the Bank of Japan refrained from signaling any future hikes after scrapping the last negative interest rate regime.

Wall Street is so divided on whether the U.S. stock market’s meteoric rise has gone too far, too fast that even Bank of America’s own strategists disagree.

There is little evidence that the frenzy for artificial-intelligence is pushing the market into bubble territory, according to BofA’s Savita Subramanian. Her view runs counter to what the firm’s chief investment strategist Michael Hartnett said last week. 

“There’s no broad spread euphoria,” Subramanian said in a joint interview with Jill Carey Hall, the firm’s head of small- and mid-cap strategy on Bloomberg Television. “The risks are sitting outside of the public market,” adding that private credit and private equity, along with regional banks are where credit risks are bubbling up.

The latest BofA fund manager survey showed that investors were split on whether or not artificial intelligence stocks are in a bubble, with 40 per cent saying “yes” and 45 per cent answering “no.”

Bullish positioning softened for U.S. equities last week, according to Citigroup strategists led by Chris Montagu. While S&P 500 and Nasdaq positioning remains net long — and moderately extended — the current setup leaves less positioning risks for both indexes, they noted.

A survey conducted by 22V Research showed that 56 per cent of investors think the next 10 per cent move in the S&P 500 will be higher. In addition, the poll revealed that 37 per cent expect a “risk-on” reaction to the Fed’s decision, 33 per cent said “risk-off” and 31 per cent, “negligible/mixed.”

With the Fed expected to hold rates steady for a fifth consecutive meeting on Wednesday, attention will shift to the central bank’s projections in the so-called dot plot. 

The summary of economic projections will reveal whether still-robust data are giving officials cause to dial back intentions to cut rates — or whether their outlook for three reductions this year remains on track.

“Whether the rise in yields and the dollar can continue comes crucially down to whether the Fed validates the hawkish narrative or not,” said Win Thin and Elias Haddad at Brown Brothers Harriman. “If Jerome Powell can stick to the hawkish script, the message will remain consistent and market reaction will likely be limited. If he veers from the script and delivers a dovish tilt, then market reaction will likely be quite violent.”

Mark Cabana at Bank of America said that if the Fed’s dots show only two cuts in 2024, the two-year note will tumble 10 basis points, the dollar will rally and risk assets will “take it on the chin to some extent.”

Speaking in a Bloomberg Television interview Tuesday, Cabana said if the dots show three cuts — the base case for BofA economists — the two-year note will then rally five basis points, the dollar will weaken and risk will be on.

The Fed will also begin in-depth discussions about its balance sheet this week, including when and how to slow the pace at which the central bank drains excess cash from the financial system.

Since 2022, the Fed has been letting as much as $60 billion in Treasuries and as much as $35 billion in agency-backed mortgage debt mature each month and roll off its balance sheet, a process known as quantitative tightening.

“In our view, commentary around plans for the Fed’s balance sheet will be at least as important as remarks around the potential timing of rate cuts,” said Chris Senyek at Wolfe Research. “While we don’t expect an official QT tapering announcement until the May meeting, we’re hoping for color around the potential timing and pace of the wind down.”

The Fed has expressed a preference for eventual return to a Treasury-only portfolio — so the MBS runoff pace is expected to continue, though the Fed might be more flexible to extend the timeline, slowing QT, according to Naomi Fink at Nikko Asset Management.

“There’s also a bias toward coupon securities, which means the Fed over time has to increase its T-bill holdings relative to its coupon holdings, which all else equal, argues for waning support for the long-end of the curve,” Fink noted.

Corporate Highlights:

• Cryptocurrency-linked stocks slipped as Bitcoin extended a retreat following a record daily outflow from the world’s biggest exchange-traded fund for the token.
• MicroStrategy Inc. made its second multi-million dollar purchase of Bitcoin in a little more than a week, raising the company’s holdings to more than 1 per cent of all the cryptocurrency that will ever be issued.
• Nvidia Corp. Chief Executive Officer Jensen Huang said his company is well placed to grab an outsized chunk of worldwide spending on data center equipment because of the variety of chips and software it’s producing.
• Michael Dell is unloading shares in his namesake computer company for the first time in almost three years as Dell Technologies Inc.’s stock soars on artificial-intelligence optimism.
• Macy’s Inc. has opened its books to Arkhouse Management Co. and Brigade Capital Management, the investment firms pushing to take over the famous U.S. department store chain.
• Boeing Co. has been exploring the sale of at least two of its defense businesses, as the beleaguered aircraft manufacturer fights through its biggest crisis in years.
• Chevron Corp.’s discussions with Exxon Mobil Corp. and China’s Cnooc Ltd. over a prolific oil field off the shores of Guyana ended “abruptly” a few weeks ago, Chief Executive Officer Mike Wirth said.
• Gildan Activewear Inc., the Canadian clothing manufacturer that owns the American Apparel brand, says it has “several” potential buyers interested in a friendly takeover.

Key events this week:

• Eurozone consumer confidence, Wednesday
• Fed rate decision; Chair Jerome Powell holds news conference, Wednesday
• Reddit’s IPO, Wednesday
• ECB’s Christine Lagarde speaks, Wednesday
• Eurozone S&P Global Services PMI, S&P Global Manufacturing PMI, Thursday
• Bank of England rate decision, Thursday
• U.S. Conference Board leading index, existing home sales, initial jobless claims, Thursday
• Nike, FedEx earnings, Thursday
• Japan CPI, Friday
• Germany IFO business climate, Friday
• Atlanta Fed President Raphael Bostic speaks, Friday
• ECB’s Robert Holzmann and Philip Lane speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.3 per cent
• The Dow Jones Industrial Average rose 0.8 per cent
• The MSCI World index rose 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro was little changed at $1.0865
• The British pound was little changed at $1.2721
• The Japanese yen fell 1.2 per cent to 150.90 per dollar

Cryptocurrencies

• Bitcoin fell 4.4 per cent to $64,398.15
• Ether fell 5 per cent to $3,334.02

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.30 per cent
• Germany’s 10-year yield declined one basis point to 2.45 per cent
• Britain’s 10-year yield declined three basis points to 4.06 per cent

Commodities

• West Texas Intermediate crude rose 0.9 per cent to $83.44 a barrel
• Spot gold fell 0.1 per cent to $2,157.63 an ounce