Stocks Reach New Highs As The Rally Broadens On Lower Bond Yields, Better Earnings - What Is Next?

U.S. stocks reached new highs last week as the rally broadened on lower bond yields and better earnings reports.

The S&P 500 ended the week at 5,234.18, up 2.3%; the Dow Jones at 39,475.90, up 1.98%; the tech-heavy Nasdaq at 16,428.82, up 2.9%; and the small caps Russell 2000 at 2,072.00, up 1.60%.

This time, the stock rally spread beyond technology, with consumer service stocks gaining 2.63% for the week, industrials 2.27%, and oil and energy 1.80%.

The catalyst for last week's gains was a dovish Fed statement following its regular monetary policy meeting in the middle of the week. The nation's central bank left its official interest rate, the Federal Funds Rate, unchanged. However, it announced three interest rate cuts for this year despite the elevated inflation and the upping growth expectations for the U.S. economy.

"The Fed confirmed it expects to cut rates three times in 2024 and raised its GDP forecast from 1.4% to 2.1% for this year...a 'tastes great, less-filling' message that the market cheered," commented Jeff Krumpelman, Chief Investment Strategist and head of Equities at Mariner Wealth Advisors.

The cheers were clear and loud in the bond market, where traders and investors drove bond prices higher and yields lower. The benchmark 10-year Treasury bond yield, which hovered above 4.30% early in the week, ended the week around 4.20%.

As investors move funds to riskier assets for higher returns, lower bond yields are bullish for stocks.

"What promised to be a monster week of event risk for financial markets certainly lived up to its billing with headlines galore throughout the last five trading days, as equities and the greenback both kicked higher," Michael Brown, Senior Research Strategist at Pepperstone, said.

"Nevertheless, despite the noisy nature of the week, the fundamental narrative has changed little, with the path of least resistance for risk assets continuing to lead higher as a quieter week awaits," Brown added.

Another catalyst for stock gains was the Nvidia conference early in the week, reinforcing the A.I. hype over the semiconductor cycle.

Then, better second-quarter earnings from bellwether stocks like Micron Technology and FedEx added to investor excitement for semiconductors and the economically sensitive sectors of the market.

"Since last fall, we have seen a massive broadening in global participation in the ongoing bull market in virtually all sectors, styles, market caps, and countries," said Thomas Samuelson, CFA, CMT. "The broadening has been so emphatic that we would characterize it as 'deafening' if you know what to listen for."

Krumpelman provides further insight into the broadening of rallies in equities.

"The market is showing continued signs of broadening out with financial and energy stocks showing leadership and providing renewed confidence that this is not a Magnificent 7/tech only market," he said, adding, "We particularly believe that this suggestion that market leadership is narrow and concentrated is distorted and exaggerated in misleading ways."

In addition, Krumpelman thinks investors are beginning to appreciate and recognize the rising earnings estimates for the S&P 500 index. Revenue growth remains surprisingly robust, and margins are on the upswing again during this window of easing cost pressures and increasing labor productivity.

David Russell, Global Head of Market Strategy at TradeStation, sees the prospect of interest rate cuts supporting the equity rally. "Investors are relieved to see three cuts stay in the dot plot, supporting markets and risk appetite," he said, adding, "The Fed might wake up with a hangover, but the punchbowl isn't going away yet."

Still, Brian Henderson, Chief Investment Officer at Bok Financial, also has a few words of caution for investors. "The bottom line is that being ready for everything is important," he said. "Economic activity can weaken very quickly. The Fed needs to be nimble: they currently can afford to be patient given the still-tight labor market and strong gross domestic product (GDP) data—but be on guard for sudden changes."

Brown expects markets to be wary of the U.S. jobs report on April 5, CPI on April 10, and the beginning of Q1 earnings season the following week.

"Until then, with data flow set to be relatively limited, markets should continue to take the path of least resistance, which continues to lead higher for both the greenback and global equities," he added.