The S&P 500 rose to its tenth record closing level in less than a month, partly buoyed by expectations of solid corporate profits. Investors are hoping that cooling inflation will convince the Federal Reserve to reduce interest rates, however, recent economic data has highlighted the strength of the economy. This strengthens the case for the Federal Reserve to maintain interest rates or delay reducing them. The gains were led by Big Tech stocks, particularly Nvidia, Microsoft, and Amazon. Cloudflare and Expedia however, fell despite reporting results that beat expectations, the former due to signing its largest renewal ever and largest new customer, and the latter citing expectations of slower growth in bookings. The bond market showed signs of calm with the yield on the 10-year Treasury inching up to 4.16%. This is a positive sign as the stock market hits new highs when rate cuts are not expected imminently.

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Latest Stock Market Updates

The S&P 500 rose to its tenth record closing level in less than a month, buoyed by expectations of solid corporate profits and the strength of the economy. The gains were led by Big Tech stocks, particularly Nvidia, Microsoft, and Amazon, cloud-service company Cloudflare and travel company Expedia however, fell despite reporting results that beat expectations. The bond market showed signs of calm with the yield on the 10-year Treasury inching up to 4.16%. This is a positive sign as the stock market hits new highs when rate cuts are not expected imminently.

A Strong Economy, Solid Corporate Profits

The stock market's recent rally began with hopes that cooling inflation would encourage the Federal Reserve to dial back interest rates. While some economists anticipate that growth will slow in 2023, the economy currently looks robust. This strengthens the case for the Federal Reserve to maintain interest rates or delay reducing them, especially as corporate profits remain strong.

Earnings Reports Drive Sector Performance

The strength of corporate profits has been a significant driver of sector performance. Recently, Cloudflare and Expedia missed revenue expectations but beat earnings forecasts. Cloudflare's share price rose 19.5% after the company announced its largest renewal ever and signed its largest new customer despite the challenging economic environment. On the other hand, Expedia tumbled 17.8% after forecasting slower growth in bookings and announcing a new CEO who will take over in May.

Buoying Stocks: The Role of Earnings Expectations

Currently, profits for companies within the S&P 500 index have largely exceeded expectations, increasing optimism on Wall Street. According to FactSet, more companies are exceeding earnings expectations than usual during this earnings season, which is roughly two-thirds complete. This is a welcome development for investors, though contrarians caution that it may have carried stocks to expensive levels.

The Bond Market's Significance

The bond market is now showing encouraging signs of calm, with the yield on the 10-year Treasury rising modestly to 4.16%. Earlier in the month, yields surged, causing a sharp sell-off in the stock market and a pivot by the Fed to a more aggressive stance on interest rates. This development is positive, as it demonstrates that the stock market can hit new highs without relying heavily on expectations for imminent rate cuts.

A Word of Caution from Experts

Mark Hackett, Nationwide's chief investment research officer, cautions that investors must resist the complacency that can occur during a strong and steady bull run. He emphasizes the need to be mindful of the market's emotional aspects and to consider a well-balanced portfolio that includes a range of assets. This approach can help reduce risk and increase opportunities, especially in uncertain economic conditions.

Global Market Performance

Stock indexes abroad were mostly modestly lower, with Tokyo's Nikkei 225 edging up by 0.1% after touching a 34-year high earlier in the day. Several Asian markets were closed for the Lunar New Year holiday.

Conclusion

Wall Street's recent milestones, coupled with a more calm bond market, suggest a healthier and less emotional stock market. Solid corporate profits and a robust economy underpin these gains. Nevertheless, uncertainties remain, and experts recommend diversification and a cautious approach. As the earnings season progresses, focusing on companies reporting solid results and positive outlooks may provide further gains in the short term.