Stocks Set for Longest Weekly Gain Since February

Stocks fluctuated near record highs after a rally set the market on course for its longest streak of weekly gains since February. This positive momentum was fueled by recent inflation reports, which raised hopes for Federal Reserve rate cuts, and strong corporate earnings. The S&P 500 was headed toward its fourth consecutive week of gains. All eyes are now on Nvidia Corp.’s upcoming earnings report, a key player in the artificial intelligence sector. Despite the market slowing down over the past two days, it remains on track for its best month in 2024.

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Mark Newton from Fundstrat described the situation as "the pause that refreshes," suggesting that while investors might consider waiting for a possible consolidation, any market weakness is likely to be short-lived. He remains bullish, predicting that consolidation could make the S&P 500 more attractive, potentially pushing it up to 5,400. Currently, the S&P 500 hovers near 5,300, and the Dow Jones Industrial Average fluctuates around 39,900 after briefly hitting 40,000 for the first time on Thursday. GameStop Corp. saw a sharp decline due to its announcement to sell up to 45 million shares, disrupting the meme stock rally from earlier in the week.

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Approximately $3 trillion worth of options were set to expire on Friday, according to Rocky Fishman at Asym 500. This expiration is a significant event on Wall Street as it requires investors to either roll over existing positions or establish new ones, potentially causing sudden price swings. Meanwhile, Treasury 10-year yields increased by three basis points to 4.4%, and the dollar remained relatively unchanged.

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Investor sentiment has reached levels indicative of market "euphoria," spurred by increased trading volumes in meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc., as noted by Citigroup Inc. Citi’s Levkovich Index, which gauges trader attitudes toward stocks, re-entered euphoric territory. This contrarian indicator suggests a lower likelihood of positive returns over the following year.

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Scott Chronert and his team at Citigroup highlighted the recent volatile moves in retail-favorite stocks, which have been making headlines due to their unpredictable nature. This reflects the excess liquidity in the system. Mark Haefele from UBS Global Wealth Management believes the recent stock rally is well-supported. He notes that if inflation pressures decrease more rapidly or profit growth strengthens, the S&P 500 could potentially reach 5,500 by year-end.

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Bloomberg Intelligence data shows that analysts have significantly increased earnings forecasts for the current quarter at the fastest pace in two years, indicating that the worst of the U.S. profit slump might be over. Energy and materials companies, which are closely linked to the economic cycle, have led these upward revisions.

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As the strong earnings season concludes, Florian Ielpo from Lombard Odier Asset Management notes that attention is shifting to the broader economic outlook. He warns that lower interest rates alone might not be sufficient to sustain the markets, raising concerns about potential challenges ahead. Specifically, there is uncertainty about whether the softer growth context could negatively impact earnings.

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A series of weaker-than-expected economic data, including jobs, retail sales, and manufacturing, has pushed the U.S. version of Citigroup’s Economic Surprise Index to its lowest level since January 2023. This index measures the gap between actual data releases and analyst expectations.

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Given the softening macroeconomic conditions, Bank of America Corp. strategists predict a resurgence in long-duration bonds later in 2024. Michael Hartnett and his team highlight that investors currently favor cash, investment-grade bonds, and stocks, but few are bullish on the 30-year Treasury, which Hartnett considers the best hedge against weaker nominal growth.

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James Rossiter from TD Securities points out that markets have been volatile due to significant data surprises, especially in the U.S. While recent inflation surprises have moved in the right direction, they remain persistently high. This volatility underscores the ongoing challenges in navigating market expectations and economic realities.

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