Investors are pouring money into Wall St. as stocks hit new highs

It doesn’t seem like there’s much to worry about for investors right now.

The S&P 500 is on track for its best week of the year so far, with a gain of about 2.5 percent and one trading day remaining. That contributed to gains that have pushed the benchmark index up more than 10 percent this year, setting a string of record highs.

Other major indexes, such as the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite, have recently traded at or near record highs, as have individual companies as diverse as Microsoft, JPMorgan Chase and Walmart. Shares of social media company Reddit rose nearly 50 percent on their first day of trading on Thursday, a sign that investors are eager to see more tech companies go public this year.

The run was fueled by a wild influx of cash: Investors poured nearly $60 billion into funds that buy stocks in the United States in the week to March 13, a record for data from EPFR Global, which has been tracking for more than 13 years follows the fund flows. 20 years. A subsequent outflow of funds during the week through Wednesday – the weekly flow numbers can be scary – has not disrupted the momentum.

The rally continued this week, despite the Federal Reserve predicting on Wednesday that inflation would remain slightly higher this year than a few months ago. As a result, central bank officials expect rates to fall more slowly in 2025 than previously forecast, and only narrowly maintained their forecast of a three-quarter-point cut this year.

Just as a rapid rise in interest rates sent the stock market tumbling in 2022, expectations of lower interest rates were part of the rise in stock prices this year.

But the prospects for austerity have been slowly deteriorating, shaken by persistent 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 to the central bank’s view that only three cuts are more likely. It didn’t seem to matter to the stock market’s meteoric rally. .

For some investors, the bullishness is a sign of the Fed’s waning grip on the fate of financial markets, with money managers focusing instead on A confirmation that the economy is running and can continue to do so, even if interest rates remain high.

“It’s a nice transition that we’ve had from the need for the Fed to cut spending to an economy that supports itself, supports valuations and supports profits,” said Alan McKnight, chief investment officer at Regions Bank. “We’re moving from a Fed-driven rally to an economy- and earnings-driven rally.”

For some purists, this has always been the case. Had inflation cooled more quickly, it would likely have been a sign of an economy slowing more rapidly, prompting a series of rate cuts to support it. While the economy is still running, inflation has encountered some resistance on its way back to the Fed’s 2 percent target, but has also contributed to robust profits for the nation’s public companies. In essence, the purists argue, the Fed has shifted its stance to reflect good news for the markets, rather than allowing investor optimism to remain dependent on Fed policy.

More importantly, investors’ main fear at the start of the year – that inflation could persist faster than the Fed would like, or even accelerate again if the economy falters – has not yet materialized.

“If inflation is a bit high because the economy is strong, that’s still generally good for equities,” said Seema Shah, chief strategist at Principal Asset Management. “As long as we’re not talking about a revival of inflation, it’s pretty good news.”

According to Binky Chadha, an equity analyst at Deutsche Bank who predicted last year’s stock market rally while many were still predicting economic turbulence, investor expectations about where yields will end up this year are now at the same level as futures markets suggested in September. In the intervening period, the S&P 500 has soared, signaling the stock market’s resilience to interest rates that remain higher for longer.

For Mr. Chadha, this means the stock market is “breaking away” from the Fed because of the strength of the economy.

CEOs of American companies are also becoming more optimistic, according to the researchers a recent study by the Conference Council. Companies are increasing the amount of stock they buy back, a tactic seen as a way to push stocks higher. In another sign of confidence, Meta, Facebook’s parent company, announced in February that it would pay dividends for the first time.

Earnings expectations for the first quarter of the year, which companies will start reporting in a few weeks, have fallen but remain positive, with major companies on track for a third straight quarter of annualized profit growth.

Some analysts fear that the rosy outlook underlying the rally may yet disappoint. Despite increasing confidence among top executives, companies have indicated to analysts that they expect meager earnings growth in the future. (Granted, that’s sometimes a gamble to set expectations low enough to ensure they can outperform.) There are also signs that consumers’ finances—the fuel that powers the economy—are coming under pressure. And with the presidential election approaching, companies could hold back from hiring until the uncertainty about the outcome passes.

“Things 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 eventually expect, just not as economists and the Fed are revising their forecasts to take into account the strength of the economy.

“Right now the rally is going ahead,” he said.