S&P 500 Races Toward 30th All-Time High of 2024

What You Need to Know

Optimism over a resilient economy, improving profits and the possibility of rate cuts are pushing equities higher.
There's also speculatation that some of the $6 trillion sitting in money market cash is poised to move into stocks.
But many stocks are now becoming more sensitive to softer growth conditions, according to Morgan Stanley strategists.

Stocks headed toward fresh all-time highs as several big techs climbed despite a jump in Treasury yields, with traders gearing up for retail-sales data and a slew of Federal Reserve speakers.

The S&P 500 was set to close with its 30th record this year. Some Wall Street strategists rushed to raise their targets even as many hedge funds grow increasingly cautious. Treasuries trimmed their June rally amid a flurry of corporate-debt sales, with Home Depot Inc. selling $10 billion worth of bonds in the U.S. high-grade market.

Optimism over a resilient economy, improving earnings and the potential start of rate cuts have pushed equities up this year, with ebbing inflation and artificial-intelligence fervor also propeling equities higher.

“We believe the S&P 500 can reach 6,000 by year-end as the combination of better earnings and one or two rate cuts is like a turbo booster for stock prices,” said James Demmert at Main Street Research.

The S&P 500 rose to around 5,484 as of 2:40 p.m. in New York, with Tesla Inc. and Apple Inc. leading gains in megacaps. The Nasdaq 100 rose 1.25% —- approaching the 18,000 mark. The Stoxx Europe 600 Index was little changed as Citigroup Inc. downgraded the region’s equities, citing “heightened political risks” among other reasons.

6,000 in Sight?

Julian Emanuel at Evercore raised his year-end forecast on the S&P 500 Index to 6,000, the highest among major equity strategists tracked by Bloomberg. His new estimate tops the 5,600 level Goldman Sachs Group Inc.’s David Kostin, UBS Group AG’s Jonathan Golub and BMO Capital Markets’ Brian Belski are penciling in.

Meantime, hedge funds decreased their long-short gross leverage, which measures their overall exposure to the market, by the most since March 2022, according to a note from Goldman Sachs’s prime brokerage desk. The move points to a more cautious stance from the so-called smart money, the team wrote.

While there’s been no shortage of headlines about the latest record highs on the S&P 500, the highs have been less significant as a sign of market strength than as an influence on investor sentiment, according to Tim Hayes at Ned Davis Research.

“As record highs were reached by major benchmarks, breadth has weakened,” he said. “Benchmark records are not confirmed by most markets, sectors and stocks.”

Fedspeak in Focus

In the run-up to the latest reading on retail sales, traders also kept an eye on Fedspeak.

Fed Bank of Philadelphia President Patrick Harker said he sees one rate cut as appropriate for this year based on his current forecast, underscoring the message that high rates are likely to persist.

Investors are being warned that rates will stay higher for longer than they’d expected, with the median projection from Fed officials calling for one interest rate cut this year. And yet cash is pouring into stocks that benefit from lower borrowing costs.

Cash in Motion?

Some stock-market optimists have speculated that a swath of the roughly $6 trillion sitting in money-market cash is poised to be reallocated into equities and will give the rally another boost.

But a growing number of soothsayers at firms ranging from Morgan Stanley to Deutsche Bank AG are poking holes in that theory. With generous yields on cash amid elevated interest rates, it’s no surprise that inflows to money market funds just hit another all-time high. Yet, there’s little evidence to suggest that cash is going to move into riskier assets anytime soon.

“Choppiness and a flight to quality are likely to dominate the markets until the Fed clarifies the scope and timing of rate cuts,” said Robert Teeter at Silvercrest Asset Management. “This guidance may come as early as the Jackson Hole event in August.”

Many stocks are now becoming more sensitive to softer growth conditions, according to Morgan Stanley strategists led by Michael Wilson. They say some value/cyclical stocks have started to focus more on earnings expectations and less on the impact of interest rates

“This development is in line with our consistent view that higher rates are a clear headwind to small caps, but lower rates don’t offer a comparable benefit,” they wrote.

Stock, Bond Correlation

The correlation between stock prices and bond yields continues to invert and is the most negative since 1997, suggesting a major shift in the inflation regime is likely underway and that stock prices and bond yields may together remain subject to extreme sensitivity to inflation trends, according to according to Bloomberg Intelligence strategists led by Gina Martin Adams.

“The correlation between the two asset classes was positive for the better part of 20 years, suggesting disinflation was the dominant regime,” they said. “The positive correlation historically implied that equities trended in the direction of yields as inflation mostly coincided with growth.”

The shift in the correlation to negative might be signaling a significant longer-term change in inflation conditions has begun, the BI strategists noted. Stocks held a negative correlation to yields throughout most of the 1980s and 1990s, when inflation hurt equities.