Stock rally stalls in countdown to inflation data announcement

Wall Street traders found little encouragement to keep pushing the stock market higher at the start of a week that will bring the last inflation figures before the next Federal Reserve decision.

Equities edged lower on Monday, with investors awaiting more clues on whether the recent uptick in consumer prices was just a blip or an indication that the disinflationary trend has hit a roadblock.

After closing at record highs 16 times this year, the S&P 500 is showing signs of overheating, spurring warnings about a near-term consolidation.

“It would be natural to expect some fly in the ointment, some monkey in the wrench, to bring investor expectations back to Earth,” said Jason De Sena Trennert at Strategas.

“Stock prices, credit spreads, and the price of gold and Bitcoin suggest that monetary conditions are far from restrictive.”

The S&P 500 closed around 5,118. Boeing Co. extended its 2024 slump to over 25% on a U.S. criminal probe.

Meta Platforms Inc. slid almost 4.5%. Tesla Inc. rebounded.

In late hours, Oracle Corp. reported strong sales with growth in its closely-watched cloud computing business stabilizing.

Treasuries fell, with traders bracing for another flurry of high-grade corporate debt sales. Bitcoin hit $72,000.

U.S. consumer expectations for inflation over the next three years climbed in February – and increased even more sharply for the five-year horizon, according to a Fed Bank of New York survey.

Those figures came ahead of data expected to show inflation probably abated only gradually last month – illustrating why US officials are in no rush to cut rates.

A survey conducted by 22V Research shows 45% of investors expect the market reaction to Tuesday’s consumer price index will be “risk-off.”

While most are still betting CPI is on a Fed-friendly glide path to 2%, the share of those who think financial conditions would need to tighten rose to 36% from 22%.

While the S&P 500 has fallen on just four CPI reporting days in the past 12 months, volatility is picking up in those sessions this year.

Over the past six months, the equity gauge has moved about 0.8% in either direction on the day CPI has been released, according to data compiled by Bloomberg.

That’s the most since April and up from less than 0.5% in September.

“Expect more volatility around those releases as investors continue to determine the direction of interest rates,” said Paul Nolte at Murphy & Sylvest Wealth Management.

That sense of wariness has also been amplified by signs of an overstretched market. Not surprisingly, a handful of sentiment indicators are pointing to a growing level of “frothiness,” according to Sam Stovall at CFRA

Among those, he cites the American Association of Individual Investors’ survey showing an “unusually high” level of bullishness and the CNN Fear/Greed Indicator that recently registered “extreme greed.”

“Even though the S&P 500 is due for, and would benefit from, a digestion of recent gains, history suggests not waiting too long before adding to holdings,” Stovall added.

To Anthony Saglimbene at Ameriprise, investors are likely already incorporating a lot of good news into stock prices and moving ahead of incoming data that supports the soft-landing narrative.

“Stocks are likely overdue for some consolidation or even an extended period of modest declines at some point in the year,” he noted.

“Without a meaningful shift in the fundamental picture, we suspect investors would welcome such a downdraft and treat the event as a buying opportunity.”

Moreover, the rally in U.S. equities that began last year doesn’t reflect conditions seen in prior boom-and-bust cycles, such as big gaps between share prices and their values, or the significant use of leverage, according to Bank of America Corp.’s strategists led by Savita Subramanian.

“Sentiment has warmed up on equities since mid-2023, driving our slightly lower level of conviction in an up market, but is nowhere near bullish levels of prior market peaks,” they wrote. “In our view, this bull market has legs.”

Another aspect is that robust profits from some of the tech behemoths have also brought down sky-high valuations. They remain relatively stretched – but are still well below prior peaks.

The “Magnificent Seven” tech stocks, for example, trade near their average price-to-earnings ratio since 2015, data compiled by Bloomberg show.

The group comprises Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc.

And the ranks of Wall Street strategists playing down concerns around a bubble in US technology megacap stocks only keeps growing.

The team at JPMorgan Chase & Co. was the latest to flag that valuations of the seven tech giants that have led the record-breaking rally on Wall Street are currently lower relative to the rest of the S&P 500 than the average of the past five years.

“There is a concern over the very strong outperformance of the Magnificent 7, but we note that the group is currently trading less stretched than a few years ago, given earnings delivery,” strategist Mislav Matejka wrote in a note.

For investors questioning how much further the S&P 500 can be powered by that narrow group of shares, breadth in the U.S. stock market has actually been improving. While tech remains in the leadership position, an equal-weighted version of the S&P 500 – where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. – has recently hit a record.

“Market action last week pointed to a broadening of investor appetite for stocks,” said John Stoltzfus at Oppenheimer Asset Management.

“This brought a mix of some profit-taking among sectors that have performed exceptionally well since the start of the year in addition to a rotation and rebalancing into sectors, market capitalizations, and styles that have lagged in performance.”

To Trennert at Strategas, given the high market’s valuations and relatively low 10-year Treasury yields, it is difficult to know how much incremental stock performance can be achieved from current levels.

“We continue to be ‘bullish until the bill comes due’ – which we define as higher long-term Treasury yields.”

A bond selloff in February – which pushed Treasury yields to their highs of the year – was due in part to January’s hot consumer price data, which showed surprising strength in core services, an area of concern for the U.S. central bank.

Since then, traders have once again stepped up their rate cut bets as economic data reinforced the view the Fed may be able to start lowering interest rates later this year.

The positive outlook for bonds reached a record high in a Bloomberg’s weekly client survey.

Yields on 10-year Treasuries will be lower in a month, according to 60% of 238 respondents in the latest MLIV Pulse poll.

That’s the strongest vote on bonds since the survey first started asking the question in August 2022.

The survey was conducted March 4-8 but closed before the nonfarm payroll data on Friday.