Market Milestones: S&P 500® Index hits record high amid rate-cut expectations

05/20/2024 — Key takeaways:

• Equity markets extended their winning streak to four weeks, with the S&P 500^® Index hitting a record high.
• Investors were encouraged by easing inflation and slowing macro data, with rate-cut expectations rising.
• Institutional investor inflows and corporate buybacks are driving demand for shares.

Drivers of market movement

This week, the equity market witnessed significant milestones as investors became increasingly confident in an economic soft landing and a "Goldilocks" environment. The S&P 500^® Index hit a record high on Wednesday, reversing the decline from April in the first half of May, while the Dow Jones Industrial Average^® (the Dow) broke above 40,000 for the first time on Thursday. Bad news is once again good news, as sluggish economic data has investors rethinking rate cut expectations. The Fed Futures curve now embeds a 90% chance of a cut by September and nearly two full cuts for the year, up substantially from the beginning of the month. The move is more impressive in that investors are not acting on emotion, and market volatility has evaporated. The market lacks catalysts in the coming weeks, though market momentum and increased investor sentiment are undeniable tailwinds.

The pendulum of investor sentiment continues to swing, as institutional investors are the most bullish since November of 2021, per Bank of America’s Global Fund Manager Survey. Cash levels (4.0%) are at a three-year low, stock allocations at a two-year high, and 80% of respondents say that we will have rate cuts in the second half and will avoid a recession. Global growth expectations weakened, with a net 9% expecting a weaker economy over the next year. Corporate management teams are incrementally bullish, with Bank of America noting that corporate buybacks have been above the historical trend for nine consecutive weeks.

Inflation remains a stubborn challenge, though the lack of investor reaction suggests that it is fading as a driver for equity markets. April Consumer Price Inflation (CPI) moderated modestly to 3.4% from a year ago, down from 3.5% in March, with the last ten readings between 3% and 4%. Core CPI was 3.6%, well above the Fed’s 2% target, but the lowest reading in nearly three years. Shelter costs continue to be the primary driver, rising 5.4% from a year ago, with CPI ex-shelter up just 2.2%. Markets reacted positively, as this was the first report in several months that was not above expectations.

There are increased signs that economic growth is slowing, with retail sales flat from March, though they were up 3.0% from a year ago. The control group, which excludes several items and is included in the GDP calculation, fell by 0.3% sequentially. This mirrors comments from management teams of consumer-focused companies recently, noting that consumers are actively trading down and becoming increasingly price-sensitive. The Index of Leading Indicators was again disappointing, down nearly 6% from a year ago. The Atlanta Fed’s GDPNow™ model is forecasting growth of 3.4%, up from 1.6% in the first quarter, but the Citigroup Economic Surprise Index has deteriorated to the weakest level since early 2023 at -22. China is taking aggressive action to stabilize a weakening economy, with a broad package to support property prices.

This week, Federal Reserve officials have expressed a measured stance on the outlook for policy. Chair Powell reiterated his view that inflation will continue to improve, though his confidence is less than it was previously. New York Fed President Williams acknowledged the positive economic data but maintained that there is no immediate need to alter the current monetary policy stance. Similarly, Richmond Fed President Thomas Barkin commented on the resilience of consumer spending and the expectation that inflation will gradually decrease; however, he noted that substantially achieving the 2% inflation target will require more time. Cleveland Fed President Loretta Mester described the progress on inflation as disappointing and suggested that if long-term inflation expectations rise, the Fed may need to consider tightening policy further.

Details on performance

Investors reacted positively to cooler economic data renewing hope for a soft landing and extending the winning streak for the S&P 500^® Index to four weeks. The S&P 500 and the Dow each gained 1%, while the NASDAQ added 2%. Growth indexes outperformed value by 1%, while small caps were neutral to large caps. Leading sectors for the week included tech, real estate, and health care, while energy, materials, and consumer discretionary lagged. Volatility remains low with the VIX closing under 13, while trading volume was slightly elevated.

Global markets outperformed domestic markets, with the MSCI EAFE^® Index and MSCI Emerging Market® Index both outperforming the S&P 500. Asian markets were strong following mixed economic data, with China, Hong Kong, and South Korea up 3%. European markets were strong as well, influenced by Wall Street’s surge in the first half of the week and stronger company earnings in the second half, with Italy and Spain up 3%, the UK up 1%, and Germany and France up 1%. Latin America was slightly mixed, with Chile up 3%, while Mexico and Brazil were neutral. The trade-weighted dollar index was lower by less than 1% but remains up by 3% for the year.

This week, CPI and retail sales reports came in cooler than expected, reigniting investor optimism, with the 10-year Treasury yield down 0.1% to 4.40%. The 2-year yield is down as well by 0.06% to 4.80%, with little movement of the spread between the two yields. Credit spreads remained tight and near the tightest level of the cycle. Commodity prices were higher, with the S&P Goldman Sachs Commodity Index up roughly 2% for the week and 9% for the year. Crude prices are up 1% as economic data from the U.S. and China spurs optimism for stronger demand. Precious metals, including silver and gold, were higher by 8% and 1%, respectively. Agricultural commodities were mixed.

Investor sentiment and behavior continue to improve as markets hit record highs. Despite outflows from technology funds, EPFR data showed $12 billion of inflows into equity funds and ETFs in the latest week. Bond funds also saw $12 billion of inflows, with inflows into investment-grade and high-yield, somewhat offset by outflows from TIPS. Investor sentiment has sharply rebounded, with the CNN Fear & Greed Index at 64 on a scale from 0-100, more than double the level from a month ago. The AAII Sentiment Survey saw bulls at 41%, flat from last week, but up from 32% four weeks ago.

What to watch

A light week of data awaits, including existing home sales on Wednesday, PMI data and new home sales on Thursday, and durable goods and the University of Michigan Consumer Sentiment on Friday. The minutes from the recent FOMC meeting will be released on Wednesday.