It looks like there is little that can trouble investors at the moment.
The S&P 500 recorded its best week of the year on Friday, up 2.3 percent. That added to gains that have lifted the benchmark index around 10 percent this year, setting a series of record highs.
Other major indexes, like the Dow Jones industrial average and the tech-heavy Nasdaq Composite, have recently traded at or near record highs, as have individual companies as varied as Microsoft, JPMorgan Chase and Walmart. Shares of the social media company Reddit jumped nearly 50 percent on their first day of trading on Thursday, a sign that investors are eager for more tech companies to go public this year.
The run has been fueled by a ferocious influx of cash: Investors poured nearly $60 billion into funds that buy stocks in the United States for the week through March 13, a record for data from EPFR Global, which has been tracking fund flows for more than 20 years. A subsequent outflow for the week through Wednesday — weekly flow numbers can be jumpy — did little to disrupt the momentum.
This week, the rally continued despite the Federal Reserve’s forecast on Wednesday that inflation would remain marginally hotter this year than predicted a few months ago. As a result, central bank officials expect interest rates to come down more slowly in 2025 than previously foreseen, and only narrowly maintained their outlook for three quarter-point cuts this year.
Just as a rapid rise in interest rates knocked the stock market lower in 2022, the expectation for lower rates this year has formed part of the case for stocks to rise.
But the prospects for cuts have slowly been dimming, jolted by stubborn inflation in the first two months of the year. Investors in the futures market had expected the Fed to cut rates up to six times this year, but have recently come around to the central bank’s view that only three cuts are more likely.It hasn’t seemed to matter for the stock market’s barnstorming rally.
For some investors, the bullishness is a sign of the Fed’s loosening grip on the fate of financial markets, with money managers instead homing in on confirmation that the economy is humming and can continue to do so even if rates remain elevated.
“It’s a nice transition we have had from the need for the Fed to make cuts, to the economy supporting itself, supporting valuations and supporting earnings,” said Alan McKnight, chief investment officer at Regions Bank. “We are moving from a Fed-driven rally to an economic- and earnings-driven rally.”
For some purists, this has always been the case. If inflation had cooled more quickly, it would have probably been a sign of a more rapidly slowing economy, prompting a series of interest rate cuts to support it. Although the economy is still cruising, inflation has met some resistance on its path back to the Fed’s target of 2 percent, but it has also contributed to robust earnings for the country’s public companies. In essence, the purists argue, the Fed has adapted its stance to good news for markets, rather than investor optimism’s remaining beholden to Fed policy.
More important, investors’ main fear at the start of the year — that inflation could remain quicker than the Fed would like, or even re-accelerate, as the economy falters — is yet to be realized.
“If inflation is a little strong because the economy is strong, then that is still broadly good for equities,” said Seema Shah, chief global strategist at Principal Asset Management. “So long as we are not talking about an inflation resurgence, it’s fairly good news.”
According to Binky Chadha, an equity analyst at Deutsche Bank who predicted the stock rally last year while many were still forecasting economic turbulence, investors’ expectation for where rates will end the year is now the same level that was implied by futures markets in September. During the intervening period, the S&P 500 has soared, a sign of the stock market’s resilience to rates remaining higher for longer.
To Mr. Chadha, that means the stock market is “disengaging” from the Fed because of the strength of the economy.
Chief executives at U.S. companies are growing more optimistic, too, according to a recent survey by the Conference Board. Companies are increasing the amount of their own stock they are buying back, a tactic that is seen as helping push stocks higher. In another sign of confidence, Meta, the parent company of Facebook, announced in February that it would begin issuing dividends for the first time.
Forecasts for earnings in the first quarter of the year, which companies will start reporting in a few weeks, have fallen, but they remain positive, with big businesses on course for a third straight quarter of year-over-year profit growth.
Some analysts worry that the rosy outlook underpinning the rally could yet disappoint. Despite rising confidence among chief executives, companies have been guiding analysts to expect more meager earnings growth in the future. (Granted, that is sometimes a gambit to set expectations low enough to ensure that they can outperform.) There are also signs that consumers’ finances — the fuel that powers the economy — are becoming stretched. And with the presidential election looming, companies could pull back from hiring until the uncertainty about the outcome passes.
“It could get worse from here,” warned George Goncalves, chief macro strategist at MUFG Securities.
It’s a pullback that even market watchers like Mr. Chadha expect eventually, just not while economists, and the Fed, are revising their forecasts to account for the strength of the economy.
“Right now, the rally goes on,” he said.
