Wall Street’s busy week kicked off with gains in both stocks and bonds, with the Treasury surprising several traders after cutting its quarterly borrowing estimate to US$760 billion.

The news came a few days before the Treasury’s quarterly refunding announcement and drew investors’ attention amid all the concern about a widening budget deficit. Treasury yields fell, lifting the tech-heavy Nasdaq 100 up 1 per cent ahead of results from five megacaps that have a combined market value of more than $10 trillion. Aside from the deluge of earnings of the next few days, investors are also awaiting the Federal Reserve’s rate decision and a raft of data from consumer confidence to jobs.

“This week could be key,” said Chris Larkin at E*Trade from Morgan Stanley. “If the market is going to sustain its latest breakout, it may need to avoid earnings disappointments from this week’s big-tech lineup, get encouraging news from the Fed on interest rates, and see jobs numbers that are solid, but not too hot.”

The S&P 500 topped 4,900, with Tesla Inc. leading gains in megacaps. Amazon.com Inc. abandoned its planned $1.4 billion acquisition of iRobot Corp., sinking shares of the Roomba maker. Treasury 10-year yields dropped seven basis points to 4.07 per cent. Oil fell after last week’s rally pushed futures into overbought territory. At the same time, ample crude supplies outweighed military escalation in the Middle East.

This week also marks the busiest this season for earnings, with results from Microsoft Corp., Alphabet Inc., Apple Inc., Amazon.com Inc. and Meta Platforms Inc. As most of the megacaps remain in record territory, there are concerns that investors are over- exposed to just a handful of stocks, which could open the door for some pain if quarterly results underwhelm.

The next few days will be crucial to determine whether stock valuations — particularly those of megacap U.S. technology companies — are sustainable given that investors are pricing in significant earnings growth expectations in anticipation of rate cuts coming sooner than Fed officials project, according to JPMorgan Chase & Co.’s Marko Kolanovic.

“The 800-pound gorillas all report this week,” said Paul Nolte at Murphy & Sylvest Wealth Management. “Expect to see some market volatility around those earnings. Combined with a Fed meeting, this week could be a wild ride as we head into February.”

After a bit of a rocky start to the year, the S&P 500 went on to cap a third straight weekly advance — and is now up almost 20 per cent since late October.

In the week through Jan. 23, a ratio of bulls to bears identified in an Investors Intelligence survey of newsletter writers was hovering at the highest since 2021, when stocks neared a prior peak before the 2022 bear market, Yardeni Research analysis shows. Another signal of elevated bullishness was evident in a weekly survey of retail investors by the American Association of Individual Investors.

Dan Wantrobski at Janney Montgomery Scott is on the watch for further “profit-taking” or “consolidation” in leadership areas — which remain overbought on a short-term basis, according to him.

From a fundamental standpoint, economic data in the US continues pointing to a benign backdrop for markets, according to Mark Haefele at UBS Global Wealth Management. He expects the Fed to feel comfortable cutting rates starting in May — though this will likely require further signs the economy is cooling off.

“In our view, stocks continue to price in an ‘immaculate everything’ scenario in which the Fed cuts deeply and the U.S. economy (at worst) glides down for a ‘soft landing’,” said Chris Senyek of Wolfe Research. “While we’re still not believers, our sense is that the Fed and economy are now ‘show me’ stories.”

Going into this week’s two-day Fed policy meeting, investors are assigning roughly even odds to the prospect that the central bank will start lowering borrowing costs at its next decision in March.

That makes Fed Chair Jerome Powell’s press conference, and any signal he may or may not choose to send, of critical importance. It all comes down to how officials have been reading the recent spate of economic data. On one hand, inflation numbers continue to surprise to the downside. On the other, consumer spending continues to be surprisingly robust.

“The Fed could justifiably signal a March cut,” said Robert Teeter at Silvercrest Asset Management. “Nonetheless, we expect the Fed to back away from taking action in March, while simultaneously laying the groundwork for future cuts predicated on the removal of excessively restrictive rates.”

Underscoring the wait-and-see sentiment, a JPMorgan & Chase survey recently showed the percentage of investors who are neutral on the bond market has increased to the highest since April.

“We believe the odds of Fed rate cuts occurring in the first quarter of 2024 remain low, and that the much-anticipated policy pivot won’t begin until midyear,” said Saira Malik at Nuveen. “Still, with inflation falling and monetary policy expectations recalibrating, we encourage investors to assess their taxable fixed-income portfolio allocations and to take advantage of opportunities we see across the asset class.”

Powell and his colleagues are expected to keep benchmark borrowing costs at a range between 5.25 per cent and 5.5 per cent. They may also deliberate when to start slowing down the pace of balance-sheet unwinding — a process known as quantitative tightening.

The fate of QT becomes center stage as the Fed tries to figure out what level of bank reserves is the right one, according to Peter Boockvar, author of the Boock Report. The beginning of the Fed’s unwinding of its balance sheet is starting to look further off and more drawn out than some expect, according to Wrightson ICAP.

“One potential wildcard comes in the form of the market’s response to any attempt on the part of the Fed to begin socializing the looming tapering of QT,” said Ian Lyngen and Ben Jeffery at BMO Capital Markets. “It’s bond bullish to be sure, although there is a strong argument that much of the potential for slower SOMA rollovers is already priced into the US rates market.”

More bond investors turn to neutral positioning

Meantime, blue-chip firms have sold $188.57 billion of bonds in the US in January, setting a record for the month, as companies look to take advantage of drops in longer-term borrowing costs.

The sales broke the prior record for January of around $175 billion, set in 2017, according to data compiled by Bloomberg News. And more sales are probably coming through the end of the month, Wall Street bond syndicate professionals said.

And dollar bulls are coming back with a splash in the latest MLIV Pulse survey. About 62 per cent of respondents surveyed Jan. 22-26 expect the Bloomberg Dollar Spot Index to gain over the next month. That’s the highest reading since September of 2022.

Corporate Highlights:

• SoFi Technologies Inc. reached profitability for the first time, taking the fintech one step closer to Chief Executive Officer Anthony Noto’s goal of turning the former anti-bank into a top 10 financial institution.
• Reddit Inc. is weighing feedback from early meetings with potential investors in its initial public offering that it should consider a valuation of at least $5 billion, according to people familiar with the matter, even as it is estimated below that figure in the volatile market for shares of private companies.
• Bayer AG was ordered to pay about $2.3 billion to a former Roundup user who blamed the weed killer for his cancer.
• Renault SA scrapped plans to list its electric-vehicle business, reversing course due to a lack of appetite for share sales amid a slowdown in EV demand.
• Ryanair Holdings Plc said it would jump at the chance to grab any extra Boeing Co. 737 Max jet deliveries from airlines that don’t want them, lending support to the embattled US planemaker under fire for quality lapses after a mid-air panel blowout this month.
• Holcim Ltd., a Swiss cement maker, said it will spin off its North American unit into a separate US-listed entity, a move that could unlock a higher valuation for the business.
• BYD Co.’s earnings rose on back of soaring electric vehicle sales — but fell short of analyst expectations as a price war in China hit the bottom line.
• China Evergrande Group received a liquidation order from a Hong Kong court, setting off a daunting process to carve up the biggest casualty of a property crisis that’s upending the world’s second-largest economy.

Key events this week:

• Japan unemployment, Tuesday.
• Eurozone economic confidence, GDP, consumer confidence, Tuesday
• U.S. Conf. Board consumer confidence, JOLTS jobs openings, Tuesday
• Microsoft, Alphabet earnings, Tuesday
• China non-manufacturing PMI, manufacturing PMI, Wednesday
• Japan industrial production, retail sales, housing starts, Wednesday
• Bank of Japan issues summary of opinions from January policy meeting, Wednesday
• Boeing announces earnings amid US government safety probe, Wednesday
• Federal Reserve interest rate decision and Fed Chair Jerome Powell’s news conference, Wednesday.
• U.S. Treasury quarterly refunding, Wednesday.
• China Caixin manufacturing PMI, Thursday
• Eurozone S&P Global Manufacturing PMI, CPI, unemployment, Thursday
• U.S. productivity, construction spending, ISM Manufacturing, initial jobless claims, Thursday
• Apple, Amazon, Meta, Deutsche Bank, BNP Paribas earnings, Thursday
• Bank of England interest rate decision, Thursday
• U.S. employment report, University of Michigan consumer sentiment, factory orders, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.8 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 1 per cent
• The Dow Jones Industrial Average rose 0.6 per cent
• The MSCI World index rose 0.7 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.2 per cent to $1.0831
• The British pound was little changed at $1.2711
• The Japanese yen rose 0.5 per cent to 147.47 per dollar

Cryptocurrencies

• Bitcoin rose 2.8 per cent to $43,159.08
• Ether rose 1.8 per cent to $2,303.8

Bonds

• The yield on 10-year Treasuries declined seven basis points to 4.07 per cent
• Germany’s 10-year yield declined six basis points to 2.23 per cent
• Britain’s 10-year yield declined nine basis points to 3.88 per cent

Commodities

• West Texas Intermediate crude fell 1.3 per cent to $77.02 a barrel
• Spot gold rose 0.7 per cent to $2,032.48 an ounce

This story was produced with the assistance of Bloomberg Automation.