Stocks Remain Strong and Investors Seem ‘Fearless.’ What’s Next for the S&P 500.

Markets on Thursday cheered inflation’s slackening grip, providing hope that the Federal Reserve could halt its interest-rate hikes before causing serious damage to the economy. That optimism expanded the day’s rally beyond the usual big-tech suspects.

“Investors have turned from fearful to fearless in recent months as the economy has proven to be resilient to the Fed’s tightening of monetary policy while inflation has continued to moderate,” writes Yardeni Research President Ed Yardeni.

“We can see their fearlessness in the S&P 500 VIX, which is highly correlated with the percentage of bears in the Investors Intelligence weekly survey of stock market sentiment,” he notes, citing the volatility index often used to gauge investor anxiety. “Both are down to prepandemic lows.”

Both the S&P 500 and the

Nasdaq Composite

on Thursday closed at their highest levels since early April, and both are up double-digits in percentage terms so far this year. While stocks might seem pricey, investors appear happy to focus on the profits that would eventually be bolstered by a decline in interest rates. Some analysts argue that even the biggest stock winners haven’t run out of steam yet.

Of course, the market has a habit of zigging when nearly all investors can finally agree it should zag. After all, the so-called “pain trade” can often come as stocks move opposite to expectations, meaning the market can extract the most suffering from the most people.

“Now that everyone is so bullish, we must conclude that the technicals are looking increasingly dicey from a contrarian perspective,” notes Yardeni. He would “welcome a mini-correction” that would take the S&P 500 closer to its average closing price over the last 50 days, which stands around 4,250. That could allow the market avoid a “melt-up” scenario—or one in which stocks are pushed higher by psychological factors like the fear of missing out, rather than fundamentals. The index was around 4,510 in recent trading Friday.

That said, Yardeni concedes that data continue to confirm that we’re in a disinflationary soft-landing situation that is supporting investor optimism. For now, he’s keeping his year-end target for the S&P 500 at 4,600, just 2% above where the index closed Thursday.

That might seem underwhelming, given 2023’s big move upward, but it’s better than stocks fizzling out in the second half of the year as so many have argued should happen.

Write to Teresa Rivas at [email protected]