Stocks Climb to Record, Lifted by Big Tech and Rate Cut Hopes

The stock market broke through to new heights on Friday, with the S&P 500 index finally hitting a record after weeks of bumping up against its previous peak.

The index, one of the most widely watched Wall Street benchmarks and a cornerstone of many portfolios, rose 1.2 percent to close above the high that was set in January 2022.

The record followed a staggering rally in the final months of 2023, as investors seized on signs of slowing inflation and signals from the Federal Reserve that it could begin to lift the brakes off the economy by cutting interest rates. But after coming within a hair of the high in late December, the market lost some momentum as some measures of inflation continued to run hot, crucial shipping lanes in the Middle East came under attack and fears that the market had climbed too far too fast lingered.

The rally that finally pushed stocks over the edge was rooted in gains among influential tech stocks like Apple, Microsoft, Meta and Nvidia, though the ferocious rally that lifted the valuations of these companies last year has become more mixed in 2024. On Friday, a closely followed survey of consumers showed a big rise in economic confidence paired with muted expectations for inflation, bolstering hopes for the economy.

A market high won’t eliminate anxiety about a potential recession or the risk that interest rates stay high longer than investors currently expect, said Tom Logue, a strategist at Commonwealth Financial Network. But it will help maintain some optimism on Wall Street, he said.

“To the everyday investor, to the retail investor, it’s a positive thing,” Mr. Logue said. “Psychologically, it has an impact in people’s heads when prices hit an all-time high.”

It has taken about two years for the index to recover from a slide set in motion by fears that a budding inflation problem would push the Fed to try to slow the price increases and, with them, the economy. That slide ended 10 months later after concern about an impending recession began to give way to hope in the resilience of the economy. With inflation slowing in recent months, investors also began to anticipate a change of course from Fed policymakers.

The bet that rates will come down in 2024 has given the S&P 500 its latest push, taking its rise to about 35 percent from its October 2022 low. The record on Friday also helped confirm a new bull market — Wall Street parlance for a period of exuberance that pushes stocks further into new territory.

The S&P 500’s record is a psychological signpost for investors, partly because the companies in the index account for more than three-quarters of the value of the U.S. stock market, according to S&P Dow Jones Indices. About $11.4 trillion in funds and other assets are benchmarked to the S&P 500, making its ups and downs a preoccupation of almost every investment manager.

Investors enjoyed roughly a decade and a half of gains through the index’s previous bull market, which ended in early January 2022. The latter stages were fueled partly by pandemic stimulus measures and low interest rates, but that gave way to a surge in inflation to 40-year highs, spurring policymakers at the Fed into action.

The Fed’s rapid increase in interest rates, starting in March 2022, sent shock waves through financial markets, forcing an abrupt adjustment to a new world of higher borrowing costs after more than a decade of rock-bottom rates made borrowing cheap and encouraged investors to take more risks in the search for higher returns.

Stubborn inflation, despite a series of jumbo rate increases, stoked fears that the Fed would crush the economy while trying to wrestle prices under control. That dragged stocks down and pulled the S&P 500 into a bear market in 2022, erasing more than 20 percent of its value from January to October.

But stocks began to rise again, as companies and the economy showed far greater resilience than most investors expected. Consumers kept spending, powering economic growth and allowing companies to continue raising their prices aggressively, bolstering profits.

A further tailwind came from advancements in artificial intelligence, and bets on the technology’s ability to generate big profits well into the future. Nvidia, the chipmaker, was one of the biggest beneficiaries of this trend: Its stock has risen more than 400 percent since the S&P 500 hit its low, making it one of the handful of companies worth more than $1 trillion in market value.

It joined Alphabet, Amazon, Apple, Meta, Microsoft and Tesla as one of the “Magnificent Seven” stocks, which have had an outsize impact on the performance of the S&P 500 because of their size.

The S&P 500 is weighted by market capitalization, meaning that moves of the biggest companies contribute far more to the performance of the index. Adjusting the index to give every company equal weight would put the S&P 500 about 5 percent below its record, highlighting the hefty contribution of this small number of stocks.

As inflation has fallen and confidence in the economy’s prospects has risen, this dynamic has begun to shift, with a broader set of companies contributing to the market rally.

The Russell 2000 index, which tracks smaller companies that tend to be more sensitive to changes in the U.S. economy than the multinationals in the S&P 500, has also risen over the past couple of months. But it remains roughly 20 percent from its record, set in late 2021.

That makes some analysts think that there is more room for the rally to run, with slowing inflation set to breathe new life into the market. Traders in the futures market are now betting that the Fed could begin to lower rates as soon as March. If that view changed substantially — because of a cautionary note from the central bank or economic data that undermines the outlook — it could lead to a rocky stretch for stocks.

The S&P 500’s rally over the past 15 months has been periodically derailed by such moments of retreat, with setbacks on the path to lower inflation, mixed earnings from major companies, and economic threats stemming from the war in Ukraine and the widening conflict in the Middle East.

There are other reasons for caution, with many economists predicting that the economy will slow in 2024, at the same time that consumers begin to buckle under the weight of expensive credit card debt and other borrowing.

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