While each successive record tends to cement Wall Street’s unbridled bullishness, a growing chorus of skeptics warns the frenzied march higher is getting ahead of itself. Hedge funds have started dialing back their market exposure, with Goldman Sachs Prime Services reporting the biggest drop in leverage since early 2022 as the “smart money” takes a more defensive stance.
Yet for every doubting voice, there seems to be an emboldened stock market bull ready to revise their targets even higher. On Monday, Evercore’s Julian Emanuel raised his year-end S&P 500 forecast to 6,000 – the highest among major Wall Street strategists and implying over 10% further upside from current levels.
So what exactly is fueling the relentless melt-up at a time when economic growth shows signs of moderating? A convergence of factors led by receding inflation fears, the prospect of Fed rate cuts, and frothy speculation around disruptive themes like artificial intelligence.
The easing of price pressures has been a driving force. After peaking above 9% in 2023, economists project inflation will continue moderating towards the Fed’s 2% target amid cooling consumer demand. That’s allowing traders to bet the central bank will start reversing its aggressive rate hiking campaign as soon as September, providing a powerful tailwind for equities.
“Improving inflation trends would lead to a more constructive policy outlook, which should be a tailwind for equities and fixed income,” said researchers at Glenmede Investment Management. “A September rate cut is likely on the table.”
Of course, Fed officials have pushed back on expectations for steep rate cuts, reiterating that rates will likely remain restrictive for a while. But the Fed Fund futures market remains convinced of looser policy by year-end.
Fueling that enthusiasm is the burning zeal around cutting-edge themes like artificial intelligence and generative AI. The powerful rallies in mega-cap tech leaders have turbo-charged indexes like the Nasdaq-100, which is up nearly 35% year-to-date. Firms from Microsoft to Google parent Alphabet have soared amid optimism their AI investments will mint a new era of computing.
At the same time, shrinking bond yields have eased financial conditions, supporting equity valuations – especially in rate-sensitive growth sectors. The 10-year Treasury yield dipped back below 4.3% on Monday, extending a sizeable retreat from March’s highs above 4.6% amid rising hopes of a soft economic landing.
Underpinning the rally is the notion that some $6 trillion sitting in low-risk money market funds could get funneled back into stocks, emboldening dip-buyers to chase the market ever higher. While skeptics doubt the “great rotation” thesis, any whiff of outflows from cash could spark bouts of frenzied buying from investors piling in for fear of missing out on further gains.
To be sure, the sheer volume of record highs smashed in 2024 has become as much a sentiment indicator as a sign of genuine market strength. Measures of market breadth have steadily deteriorated, even as the large-cap indexes scale new peaks. That signals an increasingly narrow group of stocks doing the heavy lifting – a potential warning signal for traders watching for an impending reversal.
Still, with Wall Street’s biggest brains rapidly marking up their forecasts, Main Street investors have little incentive to fight the Fed-enabled melt-up. Whether the rally proves durable could ultimately hinge on earnings holding up and the central bank’s policy guidance around rates. For now, the path of least resistance appears to remain solidly higher.
