Wall Street notched a milestone, with the S&P 500 topping 5,000 amid a renewed rally in big tech and hopes the Federal Reserve will soon be able to cut rates — bolstering the outlook for corporate profits.

Just as Americans get ready for football’s biggest night — with tickets for Sunday’s Super Bowl setting fresh records — U.S. stocks scored a victory of their own to hit another all-time high. Emboldened by bets on a soft landing and the power of artificial-intelligence — equities continued to push forward, defying doomsayers and warnings about an overstretched market.

“The S&P 500 is the best single barometer of confidence in Corporate America’s earnings power and the strength of the economy,” said George Ball, chairman of Sanders Morris. “The direction of the S&P 500 reflects whether the economy and earnings are improving or deteriorating.”

A few days ahead of the key consumer price index, investors breathed a sigh of relief as a government report — which is usually ignored by markets — confirmed inflation progress at end of 2023.

In the immediate aftermath of the data, Treasuries rose — but quickly reversed that move. The two-year yield went back to levels seen since before the Fed’s December “pivot.” Fed Bank of Atlanta President Raphael Bostic said he’s “laser focused” on returning inflation to target, and his Dallas counterpart Lorie Logan said she sees no urgency to cut rates.

To David Donabedian at CIBC Private Wealth U.S., the current economic backdrop supports Wall Street’s bullish momentum.

“The market has pivoted from believing the Fed would be its savior to deciding it doesn’t need a savior with the economy supporting it,” Donabedian noted.

With the S&P 500’s new 5,000-point milestone, the question is: what’s next for the index?

Performance for the gauge has been positive after reaching major milestones, according to Adam Turnquist at LPL Financial. Of the last nine, the index posted a 12-month average return of 10.4 per cent — with 78 per cent of occurrences producing positive results, he noted.

“A close above this closely watched level will undoubtedly create headlines and further feed fear of missing out emotions,” Turnquist noted. “Outside of a potential sentiment boost, round numbers such as 5,000 often provide a psychological area of support or resistance for the market.”

For now, that’s “just a big round number,” according to Matt Maley at Miller Tabak + Co.

“Of course, if the market rolls over in any meaningful way from this level, that will change things,” he noted. “A failure at that level would make it a new key resistance level. Either way, the stock market has seen a fabulous rally this year. So unless any decline becomes a substantial one, it won’t mean a whole lot for the big picture.”

“While some will say it is just another number in the vast sea of numbers that we digest every day, this one is a bit different,” said Kenny Polcari at SlateStone Wealth. “5,000 represents a new millennium, and so it does create additional excitement. So I would expect the excitement to continue for a bit more.”

Another reason sustaining the stock market’s strength to start the year is certainly the outlook for corporate profits.

With earnings season around two-thirds done, companies are solidly beating expectations. Some 80 per cent of S&P 500 companies reporting results this earnings cycle have surprised to the upside, handily exceeding the 10-year average of 74 per cent, according to Bloomberg Intelligence data through Friday morning. 

Analysts are responding by lifting projections. Wall Street now sees fourth-quarter earnings growing 6.5 per cent 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 per cent 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.

To Mark Hackett at Nationwide, the strong momentum has brought skeptical institutional and retail investors back into the market — which has a compounding effect on the rally — though it is increasingly driving questions of sustainability.

Indeed, 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.”

With U.S. equities now trading at 21 times forward earnings amid lofty interest rates and little demand for cheap hedges against the backdrop of low volatility levels, bulls and bears are wrestling over the sustainability of this rally, according to Jose Torres at Interactive Brokers.

“Are we entering a new era of loftier valuations due to rising productivity, increased retail participation, and money shifting from the East to the West?” Torres said. “Or is this a ‘bubblicious mania’ that will end in tears as wild speculation takes over markets? In the end, only time will tell, but my intuition keeps me in the bearish camp.”

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 per cent 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.

The equity market strength despite changing Fed expectations and higher interest rates is notable given the sharp reactions to the Fed in recent years, said Nationwide’s Hackett.

“A less emotional market is a positive sign, though investors must fight against the complacency that is a natural reaction to such a strong and steady bull run,” he added.

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.

Corporate Highlights:

• Cryptocurrency shares climbed as Bitcoin advanced beyond US$47,000.
• New York Community Bancorp’s chief executive officer and other insiders bought more than 200,000 shares of the stock, which has lost about half its value since last week’s shock announcement of a dividend cut and larger loan-loss provisions.
• Cisco Systems Inc. is cutting thousands of jobs as the largest maker of computer networking equipment restructures its business to focus on high-growth areas, Reuters reported.
• Expedia Group Inc. named Ariane Gorin as chief executive officer of the online travel company, succeeding Peter Kern, who has been in the role since 2020.
• Separately, Expedia reported gross bookings of $21.7 billion in the fourth quarter, missing analysts’ average estimate of $22 billion.
• PepsiCo Inc. gave a full-year sales forecast that fell short of analysts’ estimates and reported a drop in volumes in the North America beverage and Quaker foods units.
• Exxon Mobil Corp.’s exploratory drilling off the coast of Guyana will be “well south” of the disputed territory that Venezuela claims as its own, according to a senior company executive.
• Take-Two Interactive Software Inc., a video-game company, slashed its full-year net bookings forecast below consensus estimates.
• Paramount Global Chief Executive Officer Bob Bakish predicts this weekend’s Super Bowl broadcast on CBS will set records for advertising sales and viewers.

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 1 per cent
• The Dow Jones Industrial Average fell 0.1 per cent
• The MSCI World index rose 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0787
• The British pound rose 0.1 per cent to $1.2630
• The Japanese yen was little changed at 149.29 per dollar

Cryptocurrencies

• Bitcoin rose 5 per cent to $47,581.03
• Ether rose 2.8 percent to $2,492.76

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.18 per cent
• Germany’s 10-year yield advanced three basis points to 2.38 per cent
• Britain’s 10-year yield advanced four basis points to 4.09 per cent

Commodities

• West Texas Intermediate crude rose 0.4 per cent to $76.55 a barrel
• Spot gold fell 0.4 per cent to $2,025.38 an ounce