Equity markets near peak, longest weekly gain streak since Feb.

Equity markets danced close to historic peaks as a surge set the stage for the longest series of weekly gains since February. The S&P 500 edged towards its fourth consecutive positive week, fueled by renewed optimism sparked by inflation figures hinting at potential Federal Reserve interest rate reductions. Robust corporate earnings added to the momentum, with all eyes now turning to Nvidia Corp.’s forthcoming earnings report, symbolizing the artificial-intelligence boom. Despite a slight slowdown in momentum over the past two days, the market remains on course for its most impressive month in 2024.

Investor Sentiment and Market Dynamics

Mark Newton of Fundstrat noted a temporary pause in market movements, suggesting a potential consolidation phase. However, he remains optimistic, anticipating any weakness to be short-lived. Newton emphasized maintaining a bullish stance, projecting the S&P 500 could climb up to 5,400 post-consolidation.

The S&P 500 hovered around the 5,300 mark, while the Dow Jones Industrial Average fluctuated near 39,900 after briefly touching 40,000 for the first time on Thursday. However, GameStop Corp. experienced losses following plans to issue up to 45 million shares, dampening enthusiasm amidst the meme-driven surge witnessed earlier in the week.

Approximately $3 trillion worth of options were set to expire Friday, adding to the market’s volatility. Short-term contract trading expanded, keeping Wall Street on edge as investors navigated between renewing existing positions and initiating new ones, potentially leading to abrupt price swings.

Options expiry worth $3 trillion intensifies market volatility, with short-term trades amplifying unpredictability, keeping investors cautious, WSJ Subscription Offers said.

Evaluating Investor Sentiment

Citigroup’s Levkovich Index shows euphoric trader sentiment, driven by heightened trading volumes in meme stocks like GameStop and AMC. Scott Chronert’s team at Citigroup warns these levels might signal reduced future returns.

Mark Haefele at UBS Global Wealth Management emphasized the solid foundation of the recent stock rally. He speculated that if inflationary pressures ease or profit growth surpasses expectations, the S&P 500 could reach 5,500 by year-end.

Shifting Focus to Economic Landscape

As earnings season winds down, attention is shifting towards the broader economic landscape. Florian Ielpo at Lombard Odier Asset Management noted concerns about whether lower interest rates alone could continue to bolster the equity markets amidst a softer growth environment, raising questions about potential impacts on earnings.

Analysts have swiftly revised earnings projections for the ongoing quarter, notably in energy and materials sectors. Despite these revisions, weaker-than-expected data in employment, retail sales, and manufacturing have lowered Citigroup’s Economic Surprise Index. This index for the US is now at its lowest point since January 2023.

Forecasting Market Trends

Looking ahead, strategists at Bank of America Corp anticipate a resurgence in demand for long-duration bonds later in 2024. Michael Hartnett’s team pointed out heavy investor positioning in cash, investment-grade bonds, and stocks. They emphasize the lack of bullish sentiment towards the 30-year Treasury, seen as an optimal hedge against sluggish growth.

James Rossiter at TD Securities highlighted the equity markets sensitivity to volatile data surprises, particularly in the US. Despite recent favorable trends in inflation surprises, elevated levels persist, underscoring the ongoing uncertainty in market dynamics.

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