Stocks soar to record levels, lifted by hopes for big tech companies and interest rate cuts

The stock market broke to new highs on Friday, with the S&P 500 index finally hitting a record after weeks of running close to its previous peak.

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

The record followed a dizzying rally in the final months of 2023, as investors seized on signs of easing inflation and signals from the Federal Reserve that it might lift the brakes on the economy by cutting interest rates. But after falling within a hair of a high in late December, the market lost some momentum as some inflation measures continued to run high, crucial shipping lanes in the Middle East came under fire and concerns that the market was moving too fast increased, continued. .

The rally that ultimately pushed stocks over the edge was rooted in gains among influential tech stocks like Apple, Microsoft, Meta and Nvidia, although the wild rally that lifted these companies' valuations last year has become more mixed in 2024. closely monitored research among consumers showed a large increase in economic confidence, combined with subdued inflation expectations, boosting hopes for the economy.

A market high won't allay fears of a possible recession or the risk that rates will remain high for 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.

“For the average investor, for the retail investor, it's a positive thing,” Mr. Logue said. “Psychologically, it has an impact in people's minds when prices reach record highs.”

It took about two years for the index to recover from a decline triggered by fears that a burgeoning inflation problem would prompt the Fed to slow price increases and thus the economy. That decline ended ten months later, as concerns about an impending recession gave way to hopes for the economy's resilience. As inflation has eased in recent months, investors have also begun to anticipate a change of course from Fed policymakers.

The bet that rates will fall in 2024 has given the S&P 500 the latest boost, pushing it up to about 35 percent from its October 2022 low. Friday's record 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 guidepost for investors, in part because the companies in the index represent 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 is compared to the S&P 500, making the ups and downs a concern 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. These latter stages were partly fueled by pandemic stimulus and low interest rates, but that gave way to a rise in inflation to 40%. annual highs, prompting policymakers at the Fed to take action.

The Fed's rapid rate hike, which began in March 2022, sent shockwaves through financial markets, forcing an abrupt adjustment to a new world of higher borrowing costs after more than a decade of rock-bottom rates, making borrowing cheap and emboldening investors more risks in the search for higher returns.

Stubborn inflation, despite a series of massive rate hikes, fueled fears that the Fed would crush the economy as it tries to control prices. That dragged stocks lower and sent the S&P 500 into a bear market in 2022, wiping more than 20 percent of its value between January and October.

But stock prices started to rise again as companies and the economy showed much greater resilience than most investors expected. Consumers continued to spend, fueling economic growth and allowing businesses to continue raising prices aggressively, boosting profits.

A further tailwind came from advances in artificial intelligence and bets on the technology's ability to generate big profits well into the future. Nvidia, the chipmaker, has been one of the biggest beneficiaries of this trend: its stock has risen more than 400 percent since the S&P 500 bottomed, making it one of the few 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 outsized impact on the S&P 500's performance due to their size.

The S&P 500 is weighted by market capitalization, meaning moves by the largest companies contribute much more to the index's performance.

As inflation has fallen and confidence in the economy's prospects has increased, this dynamic is beginning to shift, with a broader group of companies contributing to the market's recovery.

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 in recent months. But it remains roughly 20 percent off the record at the end of 2021.

That makes some analysts think there is more room for a rally, with slowing inflation reviving the market. Traders on the futures market are now betting that the Fed could cut interest rates as early as March. If that view were to change materially – due to a central bank warning or economic data undermining the outlook – it could lead to a rough patch for stocks.

The S&P 500's rally over the past fifteen months has been regularly derailed by such pullbacks, with setbacks on the path to lower inflation, mixed corporate profits and economic threats from the war in Ukraine and the spreading conflict in the Middle East. East.

There are even more reasons for caution: Many economists predict the economy will slow by 2024, while at the same time consumers are beginning to buckle under the weight of expensive credit card debt and other loans.