Stocks saw small gains while still closing at fresh records, with traders weighing strong economic signals and prospects for corporate profits amid warnings that the market has run too far, too fast.

Equities are shaking off a rocky start to the year on bets the Federal Reserve will cut rates and the artificial-intelligence boom will keep fueling profit growth. Earnings season kicks into high gear this week, with companies including Netflix Inc., Tesla Inc. and Intel Corp. due to report their numbers.

“The record-high breakout we saw on Friday is attracting momentum,” said Mark Hackett at Nationwide. “Though we may not be shooting straight to the moon, the current environment is encouraging and a good reminder for investors that cash isn’t always king.”

The S&P 500 hovered near 4,850. Treasury 10-year yields declined two basis points to 4.10 per cent. The dollar wavered.

“The story is changing for bulls,” said David Donabedian at CIBC Private Wealth U.S. “Investor optimism had been driven by the belief there would be aggressive rate cuts by the Fed. Now investor belief has pivoted to view the economy as bullet-proof. No matter how high interest rates go, the economy will continue to glide right through.”

Last week’s record close for U.S. stocks has pulled valuations back to the highs seen last July. But a closer look shows that the market isn’t as expensive as it appears, according to Citigroup Inc.’s Scott Chronert.

Gains in Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc. have powered the resurgence on Wall Street. The equally weighted version of the S&P 500 strips out some of their outsized influence and results in a ratio of around 16 times forward earnings, a discount of 17 per cent to the benchmark’s standard valuation.

“With AI set to remain the key theme driving global tech stocks again this year and the rest of the decade, we maintain our preference for the semiconductor and software sectors and see opportunities in those involved in memory and AI edge-computing,” said Solita Marcelli at UBS Global Wealth Management.

“We may just get the upside follow-through that we too to signal that last week’s breakout to new all-time highs in the S&P 500 and the Nasdaq 100 has been confirmed,” said Matt Maley at Miller Tabak + Co. “We do need to point out that both indices are reaching overbought levels, so they could take a breather at any time. However, as long as any ‘breathers’ do not become severe reversals, the bulls have a lot going for them right now.”

The Ned Davis Research Leading Indicator Model — based on 10 indicators that typically lead the S&P 500  — has already been flashing bullish for most of the past year. The majority of the components are price-based and include one on sentiment with two others on macroeconomics. 

Although the model is just off its highs, with four of the seven bullish indicators starting to weaken including financials, volume demand and weekly new highs on the New York Stock Exchange, the key gauge still points to equity strength.

To Lisa Shalett at Morgan Stanley Wealth Management, with forward multiples already at historic peaks and earnings forecasts for 12 months forward ambitious, stock gains may stall in 2024 — as better earnings are met with lower valuation multiples, characteristic of a midcycle or soft-landing environment.

Even as the S&P 500 closed Friday at an all-time high, money managers and analysts are contending with data that signals U.S. economic resilience and Fed officials who’ve pushed back against reducing interest rates too soon.

The latest warning for investors unleashing dovish monetary wagers across the board: Two thirds of Bloomberg Markets Live Pulse respondents said that betting on early monetary easing is the “most foolish” among popular trades heading into 2024.

“The push and pull between interest rates and the markets have been discussed ad nauseam, but looking back over the past two years, it has been the Fed’s actions that have led the markets, said Paul Nolte at Murphy & Sylvest Wealth Management. “Will the economy catch a chill if the Fed keeps rate cuts on ice? It will depend largely on the earnings season that gets into full swing this week.”

Strategists at Wall Street’s two top-tier banks are split on the outlook for profit margins: Goldman Sachs Group Inc. sees falling inflation boosting the key metric, while JPMorgan Chase & Co. warned companies are quickly losing pricing power.

Yung-Yu Ma at BMO Wealth Management is betting the stock market outlook will brighten by the second half of the year as the Fed’s rate cuts are likely to begin and companies and consumers look ahead to a better spending environment. 

“We believe the Fed will cut rates just three or four times in 2024,” he noted. “Ultimately, the short-term interest rate trajectory continuing to point downward is more important than how many cuts take place in 2024 versus what gets pushed out into 2025. If the end of 2024 sees both growth acceleration and continued low inflation, that will set up an especially favorable backdrop for stocks.”

Corporate Highlights:

• Archer-Daniels-Midland Co. plunged after the U.S. agricultural trading giant suspended its chief financial officer and cut its earnings outlook pending an investigation into its accounting practices.
• Sunoco LP, a U.S. gas station owner, agreed to acquire pipeline and fuel storage company NuStar Energy LP for about US$7.3 billion in a move to diversify its business and buy up a key part of its supply chain.
• Digital World Acquisition Corp., the blank-check firm seeking to take Donald Trump’s media company public, surged after Ron DeSantis dropped out of the 2024 U.S. presidential race and endorsed Trump.
• Arkhouse Management Co. has asked Macy’s Inc. for access to more financial information after the U.S. department store operator rejected a $5.8 billion takeover offer from the investment firm and Brigade Capital Management.
• U.S. authorities are investigating B. Riley Financial Inc.’s deals with a key client who was linked to a securities fraud, and the use of his assets to help the investment bank obtain a loan from Nomura Holdings Inc., according to people familiar with the matter.
• Gilead Sciences Inc. slid after its drug Trodelvy failed to meet a key goal in a study of patients with advanced lung cancer.
• Scrutiny of Boeing Co.’s manufacturing quality expanded after federal regulators told airlines to check the door plugs on a second 737 model, where operators have also found issues with fasteners.
• Amer Sports Inc., the maker of Wilson tennis rackets and Salomon ski boots, is seeking to raise as much as $1.8 billion in what would be one of the year’s first major initial public offerings.

Key events this week:

• Japan BOJ rate decision, Tuesday.
• Eurozone consumer confidence, Tuesday.
• New Hampshire holds first-in-the-nation presidential primary, Tuesday.
• European Central Bank issues bank lending survey, Tuesday.
• Canada rate decision, Wednesday.
• Eurozone S&P Global Services & Manufacturing PMI, Wednesday.
• U.S. S&P Global Services & Manufacturing PMI, Wednesday.
• Eurozone ECB rate decision, Thursday.
• Germany IFO business climate, Thursday.
• U.S. GDP, initial jobless claims, durable goods, wholesale inventories, new home sales, Thursday.
• Japan Tokyo CPI, Friday.
• U.S. personal income & spending, Friday.
• Bank of Japan issues minutes of policy meeting, Friday.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average rose 0.4 per cent
• The MSCI World index rose 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.1 per cent
• The euro fell 0.1 per cent to $1.0885
• The British pound was little changed at $1.2709
• The Japanese yen was little changed at 148.05 per dollar

Cryptocurrencies

• Bitcoin fell 3.9 per cent to $40,127.03
• Ether fell 5.5 per cent to $2,337.08

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.10 per cent
• Germany’s 10-year yield declined five basis points to 2.29 per cent
• Britain’s 10-year yield declined two basis points to 3.90 per cent

Commodities

• West Texas Intermediate crude rose 2.4 per cent to $75.19 a barrel
• Spot gold fell 0.4 per cent to $2,020.87 an ounce