S&P 500 Keeps Rising to Defy Valuation Warnings: Markets Wrap

(Bloomberg) -- Wall Street is ending the big Federal Reserve week with stocks rising toward fresh all-time highs as prospects for rate cuts bolster the outlook for corporate earnings.

While calls for a temporary breather have emerged after an almost $15 trillion rally from April lows, bullish sentiment has prevailed. Officials have resumed easing policy at a time when the economy is still growing, sending a constructive signal for risk taking.

“A Fed easing cycle in a non-recessionary environment has historically helped support stocks, and we see further gains underpinned by AI, earnings, and consumption,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management. 

But after such a strong recent run, a period of consolidation should not come as a surprise, she said. Her base case calls for the US equity benchmark to reach 6,800 by June 2026, while in a bull case it could hit 7,500. 

The S&P 500 rose to around 6,650, set for its third straight up week. While the a $5 trillion triple-witching options expiry looms over the market, several analysts say it isn’t necessarily exacerbating price swings given the backdrop of low volatility.

Treasuries were slightly cheaper across the curve. Fed Chair Jerome Powell this week signaled officials will take the next rate decisions on a meeting-by-meeting basis. Swaps show bets on nearly two more rate cuts in 2025. The dollar rose.

Fed Governor Stephen Miran told CNBC his decision to dissent from fellow policymakers’ rate move this week was driven by his view that tariffs have had no material impact on inflation.

Separately, Fed Bank of Minneapolis President Neel Kashkari said he supported the US central bank’s decision to lower rates this week and penciled in two additional cuts this year.  

“The Fed’s rate cut has set a bullish tempo for equity markets,” said Craig Johnson at Piper Sandler, who expects brief consolidation. “These recent new high milestones will likely serve as a ‘pit-stop’ for this bull market before resuming higher.”

Mark Hackett at Nationwide notes that while September has historically delivered pullbacks, this year’s market has defied that pattern.

“Still, with the S&P 500 trading at 22 times forward earnings and volatility suppressed, a period of consolidation or choppiness would be a normal and healthy development.”

US stocks are trading at record levels with earnings season right around the corner, and improving expectations for Corporate America’s profit growth indicate that the rally can keep going. 

Among the companies in the S&P 500 that provided guidance for their third-quarter results, more than 22% were expecting to beat analysts’ expectations — the highest reading in a year, according to data compiled by Bloomberg Intelligence. 

In addition, the share of firms issuing worse-than-expected profit forecasts was the lowest in four quarters as well.

Speaking of earnings, the Securities and Exchange Commission will move forward with plans to overhaul investor disclosure rules for publicly-traded companies, agency Chairman Paul Atkins said Friday. 

The announcement comes the same week that President Trump issued a social media post suggesting the SEC should move to semi-annual, rather than quarterly reporting.

Meantime, Bank of America Corp. strategists said the run in US big tech stocks over the past two years has further to go and investors should position for more gains. 

A BofA team led by Michael Hartnett studied 10 equity bubbles since the start of the previous century, finding that these periods of extreme overvaluation produced average trough-to-peak gains of 244%. That suggests that, after rising 223% from their March 2023 low, the Magnificent Seven cohort has “more to go.”

Both global and US equity funds saw their biggest week of inflows since December, BofA strategists said in a note that cites EPFR Global data. Investors allocated about $68.4 billion to global equity funds for the week ended Sept. 17, while $57.7 billion went into US stock funds.

Trade discussions came back to focus, with President Donald Trump saying he would meet Chinese President Xi Jinping on the sidelines of the upcoming Asia-Pacific Economic Cooperation summit and hailed progress toward finalizing a deal over TikTok, after a highly anticipated call on Friday.

Corporate Highlights:

• FedEx Corp. reinstated its profit and sales forecast, saying revenue will grow by 4% to 6% in the current fiscal year, topping Wall Street estimates.
• Apple Inc.’s iPhone 17 Pro, Pro Max and iPhone Air are going on sale Friday.
• Meta Platforms Inc. has filed an application with US federal regulators to sell electricity in wholesale markets.
• Google will meet the European Union’s deadline to propose changes to its advertising technology business after a near-€3 billion ($3.5 billion) fine — but won’t include the full breakup the EU and industry rivals have previously pushed for.
• Elon Musk’s artificial intelligence startup xAI has raised new funding at a $200 billion valuation, according to a person familiar with the deal, making it one of the world’s most valuable startups. 
  • Neuralink Corp., EMusk’s brain implant company, plans to launch a clinical trial in the US in October aiming to use its device to translate thoughts into text, potentially opening up new possibilities for speech-impaired people to communicate.
• Boeing Co. said it would not consider new contract terms approved by a majority of striking St. Louis-area factory workers on Friday.
• Lennar Corp.’s forecast for quarterly home orders missed analysts’ estimates as affordability concerns and the wavering job market keep a lid on buyer demand.
• Intel Corp. was cut to sell at Citigroup Inc., which pointed to the beleaguered chipmaker’s rich valuation. Shares rallied 23% on Thursday after Nvidia Corp. agreed to invest $5 billion in the company.
• United Parcel Service Inc. was downgraded to market perform at BMO Capital Markets, which sees “persisting macro challenges” for the package-shipping company.
• Members of the US Centers for Disease Control and Prevention panel said Merck & Co.’s combination vaccine for measles and three other viruses shouldn’t be given as one shot to children under 4 because it increases the rare risk of seizures.
• Porsche AG and its parent Volkswagen AG cut their outlook for the year, citing the sports-car maker taking a €1.8 billion ($2.2 billion) hit to operating profit linked to pushing back the introduction of new electric vehicles.

What Bloomberg Strategists say...

“US stocks and bonds are split on the economic outlook, with equities looking too complacent about the probabilities of a recession.”

—Tatiana Darie, Macro Strategist, Markets Live. For the full analysis, click here.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3% as of 2:34 p.m. New York time
• The Nasdaq 100 rose 0.4%
• The Dow Jones Industrial Average rose 0.3%
• The MSCI World Index rose 0.2%
• Bloomberg Magnificent 7 Total Return Index rose 0.8%
• The Russell 2000 Index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.3% to $1.1748
• The British pound fell 0.6% to $1.3473
• The Japanese yen was little changed at 147.95 per dollar

Cryptocurrencies

• Bitcoin fell 1.8% to $115,482.72
• Ether fell 3.3% to $4,456.71

Bonds

• The yield on 10-year Treasuries advanced three basis points to 4.14%
• Germany’s 10-year yield advanced two basis points to 2.75%
• Britain’s 10-year yield advanced four basis points to 4.72%
• The yield on 2-year Treasuries advanced two basis points to 3.58%
• The yield on 30-year Treasuries advanced three basis points to 4.76%

Commodities

• West Texas Intermediate crude fell 1.4% to $62.66 a barrel
• Spot gold rose 1% to $3,681.85 an ounce

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