The S&P 500 and Nasdaq Composite set new records on Tuesday, as investors seized on dovish signals from central banks to extend a months-long recovery, despite continued uncertainty over the outlook for the global economy.
The S&P 500 ended the day 0.9 per cent higher at 2,933.6 thanks to a rally in the healthcare, consumer discretionary and technology sectors. That pushed the equities benchmark past its peak closing level from September 20 last year of 2,930.8.
The tech-focused Nasdaq Composite jumped 1.3 per cent to close at 8,120.8, taking it past its previous peak close of 8,109.7 on August 29.
The S&P 500 is up nearly 17 per cent so far this year and marks a recovery of about 25 per cent from a recent nadir on December 24, when it closed on the verge of a bear market. The Nasdaq Composite is up 22 per cent in 2019.
The move towards new highs comes even as some indicators in the bond market had pointed to a potential recession and as investors gird themselves for a challenging reporting season that could see S&P 500 earnings post a year-on-year decline for the first time since 2016. That all raises questions about how much further the longest postwar bull market for US equities has left to run.
Last week, Larry Fink, chief executive of BlackRock, the world’s largest asset manager, said global equity markets were poised for a “melt-up” because improving economic data and more dovish central banks would reassure big investors who have so far stayed largely on the sidelines of the 2019 market recovery.
“The record does matter,” said Michael Mullaney, director of research for Boston Partners. “It’s important because the ‘earnings recession’ that was going to happen now may not come to pass, and even first quarter earnings growth may be positive,” he added, referring to concerns US corporate earnings might slip into negative territory for two consecutive quarters.
The stock market has climbed a wall of worry, since a resolution to the US-China trade war is still lacking and data from major economies has at times been patchy.
But the Fed has had the market’s back. The central bank pledged in January to be “patient” before tightening monetary policy further, and then forecast in March there would be no further rate rises in 2019. In April, it said the next rate move could be in “either direction”. Derivatives markets are signalling a 56 per cent chance of the Fed cutting rates by the end of this year.
That has emboldened investors to snap up high-growth stocks, particularly in the technology sector, which were among the hardest hit last autumn when signs of a slowing global economy began to emerge and the Fed was still keen to tighten monetary policy.
Information technology is at the top of the S&P 500 sector leaderboard, up nearly 27 per cent since the new year.
Within IT, chipmakers have been top performers, while the high-profile tech giants collectively known as the Faangs — Facebook, Apple, Amazon, Netflix and Google’s parent company Alphabet — took relatively longer to fire up this time compared with previous market rebounds.
The Philadelphia semiconductor index that tracks 30 companies in the industry is at record highs, while the NYSE Fang Plus TM index, which tracks the Faangs and other large tech stocks, is still about 8 per cent shy of its peak in June 2018.
Ghadir Cooper, global head of equities for Barings, said a positive start to first quarter earnings season and an absence of bad news had driven stocks higher.
“We’re getting an increasingly positive outlook for equity markets. The numbers coming out are better than expected in consumer discretionary, tech and industrials, so it seems like first quarter earnings will be OK,” Ms Cooper said.
The Dow Jones Industrial Average, a narrower gauge of the US equity market, is still about 0.5 per cent from a record because of trouble for Boeing, which has the biggest weighting in the average and has been hit by concerns over the safety of its 737 Max aircraft.
In a sign that slowing growth is not far from the investors’ minds, the S&P 500 real estate and utilities sectors — which are often regarded as bond proxies and are most attractive to conservative investors — have also been trading at record highs.
Equities are the only major global asset class that analysts at Credit Suisse think will outperform over the next three to six months, and within that they favour US and emerging market stocks over eurozone equities.
“Our positive US equity view also reflects our continued preference for the IT sector,” they wrote in a recent report, adding that they were also positive on materials stocks, which would benefit from an increase in manufacturing demand in China.
Some analysts remain concerned about the recent inversion of the yield curve, when short-term borrowing rates rise above long-term ones. An inversion has preceded every recession since the second world war and is often seen as a bad omen for equities.
“Judging by historical patterns, there is a good chance that the stock market index has either peaked already, or will do soon,” noted John Higgins of Capital Economics following the inversion of the yield curve in late March.