Stocks struggled to gain traction, with big tech losing steam after a powerful rally driven by the artificial-intelligence euphoria.

A feat of multiple records in the world’s biggest equity market drove the S&P 500 briefly above 5,100. The “Magnificent Seven” group of megacaps underperformed, though Nvidia Corp. saw a modest gain and its value hovered near US$2 trillion.

“The speed of the tech rally has left investors wondering whether to take profits,” said Mark Haefele at UBS Global Wealth Management. “While we see merit in rebalancing portfolios, we believe that retaining strategic exposure to US large-cap technology is important.”

A rally in AI and optimism about economic growth at a time of easing monetary policy are the ingredients of a “magic sauce” to drive more gains in equities, according to Bank of America Corp.’s Michael Hartnett. The strategist — who has taken a more neutral tone on stocks this year after remaining bearish through 2023 — said that a “baby bubble” in AI was “growing up.

The S&P 500 barely budged Friday, while posting a weekly win. Treasury 10-year yields fell seven basis points to 4.25 per cent. Federal Reserve Bank of New York President John Williams said the economy is headed in the right direction, and it will likely be appropriate to cut rates later this year.

“We expect the momentum to continue and for markets to melt up in the short run, but the story of the stock market for this year will eventually be about the economy and the Federal Reserve,” said Chris Zaccarelli at Independent Advisor Alliance. “As long as the economy keeps expanding, it’s really hard to interrupt a bull market.”

The “tug of war” between bulls and bears is currently being dominated by the bulls — as the technical tailwinds converge with positive fundamental developments, according to Mark Hackett at Nationwide.

“We have had a powerful rally and there is still a lot of momentum in the market,” said David Donabedian at CIBC Private Wealth U.S. “Anyone who goes against it – taking positions that the market will go in the other direction – will be sorry. You do not want to bet against this market in the short term.”

The surge in Nvidia’s shares in the session that followed its results left short sellers with about $3 billion in paper losses, according to an analysis by S3 Partners LLC — which called it an “AI generated nightmare” for bearish traders.

The mark-to-market losses are another blow for contrarians who argued that Nvidia’s sky-high valuations and speculative fever had all the makings of a market bubble about to pop. The chipmaker is the third-largest US short with $18.3 billion of shares that have been borrowed and sold, according to S3.

While the rally in U.S. tech behemoths has sparked some concern about a potential bubble, the price action is aligned with earnings fundamentals, according to Barclays Plc strategists.

As long as stocks move in tandem with profit outlook, the “fear of missing out” will continue to prevail for the tech/AI space and investors will give the benefit of the doubt to lofty valuations, the team led by Emmanuel Cau wrote.

“There will likely be pullbacks and volatility over the next few months and we are supportive of the buy-the-dip mentality when it comes to big tech,” said Greg Marcus at UBS Private Wealth Management.

As hard as the S&P 500 rallied in the session that followed Nvidia’s blowout results, the advance lacked an important component — strong participation of its constituents.

Only 73 per cent of the S&P 500’s members advanced that day. That was the lowest participation for an up day of this magnitude since the immediate aftermath of the 2020 election, when the index gained 2.2 per cent while only 47 per cent of its members went up.

“Even though market breadth is still narrow, it’s wider than it was last year, with more and more stocks this year outperforming the S&P 500,” Marcus added.

To Matt Maley at Miller Tabak + Co., while earnings out of Nvidia sparked another strong advance, it was disappointing to see a “very narrow” rally — which hasn’t hurt the market yet.

However, Maley points to a significant “valuation divergence” between Nvidia and the other AI-related stocks that has been developing for some time now. 

“This should have important implications for how these stocks should be weighted in one’s portfolio — even when an inevitable correction takes place at some point in the future,” he noted.

Marcus at UBS says that if the Fed starts cutting interest rates, that will likely help spark wider breadth in the market.

Meantime, Goldman Sachs Group Inc. economists have pushed back their view on when the Fed will begin cutting rates to June after parsing recent comments from the central bank and minutes of its January meeting.

The U.S. investment bank has dropped its forecast for a May cut and now expects four reductions this year, versus five previously, with moves in June, July, September and December. It now sees four more cuts next year, versus a prior three, leaving the same terminal rate of 3.25 per cent-3.5 per cent, economists including Jan Hatzius wrote.

And rate strategists at JPMorgan Chase & Co. raised their year-end forecasts for Treasury yields “to reflect greater risk premium and a longer QT runway than previously expected,” a team led by Jay Barry said. The 10-year yield forecast rose to 3.80 per cent from 3.65 per cent.

While “yields have room to decline from their current levels in the coming months” based on “markets pricing in a less dovish path than our forecast” for Fed policy — which is for 25bp rate cuts at every meeting this year beginning in June — uncertainty over the Fed’s path is likely to persist, they noted. “And Treasury yields will likely stay more elevated with a higher risk premium to reflect higher probability of fewer cuts over time.”

Corporate highlights:

• Jeff Bezos, Nvidia Corp. and other big technology names are investing in a business that’s developing human-like robots, according to people with knowledge of the situation, part of a scramble to find new applications for artificial intelligence.
• Warner Bros. Discovery Inc. reported fourth quarter revenue and profits that fell short of Wall Street forecasts amid declining TV advertising sales and weakness at its studios business.
• Payments company Block Inc. reported results and first-quarter expectations that exceeded analysts’ estimates
• Booking Holdings Inc. gave a disappointing forecast for travel reservations and gross bookings, with the war in Israel and currency fluctuations weighing on results.
• Carvana Co. topped Wall Street’s profit expectations in the final months of 2023 and said it expects improved earnings this quarter as the used-car retailer defies the challenges of high interest rates and inflation.

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 fell 0.4 per cent
• The Dow Jones Industrial Average rose 0.2 per cent
• The MSCI World index rose 0.1 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0822
• The British pound was little changed at $1.2670
• The Japanese yen was little changed at 150.50 per dollar

Cryptocurrencies

• Bitcoin fell 1.1 per cent to $51,088.63
• Ether fell 1.1 per cent to $2,952.59

Bonds

• The yield on 10-year Treasuries declined seven basis points to 4.25 per cent
• Germany’s 10-year yield declined eight basis points to 2.36 per cent
• Britain’s 10-year yield declined seven basis points to 4.04 per cent

Commodities

• West Texas Intermediate crude fell 2.6 per cent to $76.60 a barrel
• Spot gold rose 0.6 per cent to $2,036.47 an ounce

This story was produced with the assistance of Bloomberg Automation.