Wall Street is ending the week on a positive note, with stocks closing at all-time highs on speculation the Federal Reserve will start cutting rates this year — bolstering the outlook for Corporate America. 

Another rally in the S&P 500’s most-influential group — technology — drove the gauge to a record for the first time in two years. Fueled by hopes the artificial-intelligence boom will keep powering the market higher, the benchmark topped 4,800 — defying warnings that the rally remains concentrated in a narrower group of shares.

Equities pushed higher on Friday as a drop in Treasury volatility continued to bode well for risk-taking on Wall Street. Also helping sentiment somewhat was a report seen by many as “Fed-friendly,” showing a mix of high consumer confidence and lower inflation expectations.

“Much more good than bad news in the underlying economic data as we enter 2024, with inflation cooling,” said Art Hogan at B Riley Wealth. “We’re seeing a plausible path to inflation continuing to ease gradually, an end to Fed rate hikes, and a re-acceleration of economic growth in the back half of 2024.”

The S&P 500 added 1 per cent, erasing this week’s losses. The tech-heavy Nasdaq 100 rose almost twice as much, with Advanced Micro Devices Inc. hitting a record and Nvidia Corp. leading megacaps higher. Treasury 10-year yields were little changed. The dollar fell.

Since hitting a low in October 2022, the S&P 500 has surged about 35 per cent and topped its closing high of 4,796.56. 

If history is any guide, there’s potential for further gains ahead. The gauge went 512 trading days without a record through Thursday, which ranks as the sixth-longest streak since 1928, according to Ned Davis Research. One year after hitting new highs, the index has risen 13 out of 14 times by a median of 13 per cent in that span.

“The equity market’s path of least resistance seems to be higher until the consumer pulls back and/or the labor market buckles,” said Nicholas Bohnsack at Strategas. “In the absence of a ‘soft patch’ we remain positive on the equity market having increased exposure to stocks into year-end but suspicious the same mix that led the market last year, i.e., the ‘Magnificent 7’ will continue to carry the day.”

The same group of companies that led a stellar run in stocks last year is once again on the driver’s seat in 2024. So far in January, Nvidia., Microsoft Corp., Meta Platforms Inc. and Alphabet Inc. — all part of the “Magnificent Seven” cohort — are the biggest point gainers in the S&P 500. Meantime, semiconductor shares got a boost this week from a bullish forecast Taiwan Semiconductor Manufacturing Co.

Investors are reverting to owning growth, technology, the “AI bubble” as the 10-year Treasury yield settles in a range of 3.75 per cent to 4.25 per cent, according to Bank of America Corp.’s Michael Hartnett. While U.S. shares saw redemptions at US$4.3 billion in the week through Jan. 17, tech-stock funds saw the biggest two-week inflow since August at $4 billion, BofA said, citing EPFR Global data.

“Bottom line, we’re off the bullish boil and the boat is less full, but it’s still leaning firmly positive,” said Peter Boockvar, author of the Boock Report.

After being caught flat-footed early last year, fund managers have gone all-in on technology stocks — so much so that it’s sparking warnings that the Nasdaq 100 is looking ever more vulnerable to investor pullbacks.

Hedge funds hold the highest level of net-long Nasdaq 100 futures in nearly seven years, according to Societe Generale’s weighted analysis of data on the Nasdaq 100 Index futures and e-mini contracts provided by the Commodities Futures Trading Commission. Meanwhile, a global fund manager survey from Bank of America Corp. this month showed the most crowded trade is being long the so-called Magnificent Seven stocks and other tech-related growth shares as a way to play the prospect of Fed easing.

“Based on the recent price action, Nasdaq 100 traders don’t seem particularly concerned about the upcoming earnings reports,” said Matthew Weller at Forex.com and City Index.  Now, with the “Magnificent Seven” stocks collectively trading at an “eye-watering” valuation, “the only thing that could drag down the Nasdaq 100 may be poor earnings results,” he noted

While narrow areas of U.S. equity markets are dazzling investors with new highs, such action continues to mask a widening divergence underneath the surface that speaks of ongoing “technical disease,” according to Dan Wantrobski at Janney Montgomery Scott.

“Narrow leadership such as this is a throwback to last year (mega-cap/AI/Mag 7), and our belief is that if it persists, it will trigger a wider bout of volatility not too far down the road,” Wantrobski added.

The combination of better-than-expected growth and a meaningful improvement in inflation — which gives the Fed flexibility to cut interest rates — is giving UBS’s Chief Investment Office greater conviction in its base case for an economic soft landing. While this benign outcome is mostly priced into equity markets, market gains can extend a bit further, the firm notes.

“Our June and December S&P 500 price targets are 4,900 and 5,000, respectively,” said David Lefkowitz at UBS Global Wealth Management. “We maintain a neutral preference for U.S. equities in our tactical asset allocation. With S&P 500 valuations full, in our view, we look for a pickup in earnings growth to be the primary driver of the somewhat modest upside that we expect.”

A double-digit stock rally led by megacaps in 2023 means an ever-enlarging chunk of the benchmark index is acutely tied to long-term earnings prospects — and hence more sensitive to rising yields.

With inflation concerns lingering, positive stock-bond correlations have firmed back up. The 60-day correlation between the S&P 500 and benchmark Treasuries turned positive again and has threatened bonds’ hedging role since August of last year.

“The good news is the market has done a decent job of working off some of the extremes in price and sentiment through a correction in time and through churning, as opposed to intense selling pressure,” said Keith Lerner at Truist Advisory Services. “Economic, earnings, and credit trends continue to show resilience.”

Traders also kept a close eye on remarks from central bank officials, who spoke just hours before the Fed’s traditional pre-meeting communications blackout period. 

Fed Bank of Chicago President Austan Goolsbee said a continued decline in inflation would merit discussion of reducing rates, though he stressed the central bank will make decisions meeting-by-meeting. His Atlanta counterpart Raphael Bostic said he’s open to changing his views on the timing of cuts depending on the data, though he wants to be sure inflation is “well” on the way to the 2 per cent goal before easing policy. San Francisco Fed chief Mary Daly said it’s far too early to declare victory on inflation.

Markets are overpricing the pace and amount of Fed-rate cuts as they are overlooking stubbornly high inflation, according to economist Mohamed El-Erian.

“I do think that we get to the pivot, but relative to what the market expects, it won’t be as fast or as deep,” said El-Erian, president of Queens’ College, Cambridge, and a Bloomberg Opinion columnist.

Traders have tempered their wagers on rate cuts as U.S. economic data continued to show resilience and Fed officials emphasized they want to ensure inflation is tamed before embarking on any cuts. Markets are now pricing in about 1.4 percentage points of reductions this year, compared with expectations of as much as 1.7 percentage points of easing as recently as last week.

Corporate Highlights:

• Apple Inc. vowed to open up its coveted tap-to-pay technology on iPhones to rivals in a bid to sidestep potentially massive European Union antitrust fines.
• Amazon.com Inc.’s proposed $1.4 billion acquisition of Roomba maker iRobot Corp. is expected to be blocked by the European Union’s antitrust regulator over concerns that the deal will harm other robot vacuum makers.
• Ford Motor Co. cut production of its F-150 Lightning electric truck amid fading demand for electric vehicles.
• Spirit Airlines Inc. said its deal with JetBlue Airways Corp. “remains in full force and effect” as the carrier explores ways to shore up its liquidity, offering investors a measure of relief after a federal judge blocked the multibillion-dollar buyout.
• J.B. Hunt Transport Services Inc. hauled more containers of freight than Wall Street expected in the fourth quarter, suggesting the sector may be recovering after a bad year.
• SLB will raise its payout to shareholders by 10 per cent, marking the highest dividend since 2020, as a ramp-up in drilling outside of North America buoyed results for the world’s biggest oil-field contractor.
• Ally Financial Inc. announced fourth-quarter results that topped analysts’ estimates and said it will sell a point-of-sale financing business that includes $2.2 billion of loan receivables to Synchrony Financial.
• Comerica Inc. said net interest income will probably slide 11 per cent this year and reported a plunge in fourth-quarter profit on a series of one-time charges.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 2 per cent
• The Dow Jones Industrial Average rose 1.1 per cent
• The MSCI World index rose 1.1 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.2 per cent to $1.0895
• The British pound was little changed at $1.2701
• The Japanese yen was little changed at 148.14 per dollar

Cryptocurrencies

• Bitcoin rose 1.4 per cent to $41,638.5
• Ether rose 1 per cent to $2,479.65

Bonds

• The yield on 10-year Treasuries was little changed at 4.14 per cent
• Germany’s 10-year yield was little changed at 2.34 per cent
• Britain’s 10-year yield was little changed at 3.93 per cent

Commodities

• West Texas Intermediate crude fell 0.4 per cent to $73.82 a barrel
• Spot gold rose 0.2 per cent to $2,028.23 an ounce