After a brief false start at the beginning of the new year, the stock market has returned to form in recent weeks, capping multiple record highs. On Friday, the S&P 500 climbed 1.2% to a record high of 4,839, eclipsing its previous peak of 4,796, set more than two years ago on January 3, 2022. Meanwhile, the Dow Jones Industrial Average, which has been making new highs since the end of last year, rose 1.1% to end the week at 37,863. The tech-heavy Nasdaq Composite had to settle for a 1.9% jump to a two-year high of 15,310.
With inflation cooling, investors are anticipating the Federal Reserve will be able to end its interest rate hiking campaign sooner rather than later, creating a more friendly environment for corporations.
Rob Swanke, senior equity strategist for Commonwealth Financial Network, explained that stock market valuations have been rising in recent months as investors factor in the prospect of lower borrowing costs and improved earnings expectations. He also argued that “there’s still room to move higher,” given that valuations are below their 2022 levels.
“Still, interest rates are much higher than at the beginning of 2022 and earnings expectations for 2024 are already high at close to 12% growth so expectations should be tempered,” he added.
Even with higher interest rates, investors are growing increasingly risk-tolerant with economic data proving stronger than expected in recent months. From rising retail sales reports to increasingly optimistic consumer sentiment readings, hard data continues to show the U.S. economy’s resilience, despite years of recession forecasts from experts—even the most widely predicted recession in history that simply didn’t materialize.
“Easing inflation pressures and the prospect of both lower interest rates and a soft economic landing have stoked investors’ appetite for risk,” Greg McBride, chief financial analyst at Bankrate, said in emailed comments Friday, noting that the stock market’s run has been led by tech stocks that benefit from lower rates.
The semiconductor companies Taiwan Semiconductor, Nvidia, and AMD, as well as the big tech giants like Microsoft and Meta Platforms, have been the major players driving the stock markets gains so far this year amid the AI boom, continuing 2023’s big trend in equity markets.
“Despite concerns regarding the Fed’s timetable for initiating rate cuts … markets — once again — rewarded mega technology as the promise of generative AI increasingly becomes a reality,” Quincy Krosby, Chief Global Strategist for LPL Financial, said of the trend.
Krosby also noted that the bull market is broadening out, which is a good sign for investors. Even the Russell 2000 index, which tracks small cap stocks, has begun to join “the big tech advance,” she said, arguing that it reflects “the inherent strength in the bull market” that began last year.
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