The S&P 500 index closed at a new all-time high on Wednesday, surpassing its previous record set just last week. The broad market index rose 0.25% to finish at 4,023.58, fueled by strong quarterly earnings from major tech companies.
Dow Also Reaches Milestone
The Dow Jones Industrial Average likewise reached a milestone, closing above 38,000 for the first time ever. The 30-stock index climbed 0.03% to end at 38,019.95.
Both indexes have staged impressive comebacks after falling into bear market territory last year on concerns over aggressive Federal Reserve interest rate hikes aimed at taming inflation.
Tech Sector Leads Charge
Powering the latest leg of the rally are technology stocks, which have impressed Wall Street with better-than-expected fourth quarter financial results.
Companies including Microsoft, Netflix, and IBM released earnings this week that topped analyst forecasts, boosting optimism around the tech sector.
Netflix saw its stock price rocket 8% in after-hours trading after revealing it added 7.7 million subscribers during the fourth quarter, far exceeding its own conservative guidance. The streaming giant has staged a dramatic turnaround after losing customers earlier last year.
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This wave of positive tech earnings comes on the heels of last week’s strong reports from banks and airlines. The blended earnings growth rate for S&P 500 companies stands at 2.2%, according to FactSet. If that holds by the end of earnings season, it will mark the first year-over-year expansion in earnings since the third quarter of 2021.
S&P Valuation Raise Eyebrows
Despite the recent run of good news, some market analysts caution that stocks may be getting ahead of themselves. The S&P 500’s price-to-earnings ratio now exceeds 20, indicating stocks are highly valued relative to corporate profits.
Additionally, the benchmark index has set new closing highs seven times so far in 2023. That kind of sustained upward momentum concerns analysts who see a market disassociated from economic fundamentals.
“The market seems irrationally exuberant when you consider all the storm clouds looming over the economy,” said David Templeton, portfolio manager at Horizons ETFs Management. “I would expect more volatility in the near future as investors grapple with the Fed and the possibility of a recession.”
What’s Next for the S&P 500
With Big Tech earnings mostly wrapped up, attention now turns to interest rate decisions from central banks and critical economic data due in the coming weeks.
All eyes are on the Fed’s Jan. 31-Feb. 1 policy meeting, where the central bank is expected to slow its pace of rate hikes. Markets will be listening closely for clues around how much further the Fed plans to push rates up in its battle with inflation.
January jobs data arriving Friday will also factor heavily into rate hike expectations. A strong labor market could give the Fed cover to maintain its aggression against rising prices.
Most economists predict the Fed will raise its benchmark rate by 25 basis points next week, down from a 50 basis point hike in December. But there is an outside chance the central bank pauses altogether amid signs that inflation is steadily retreating.
Beyond central bank actions, S&P 500 companies will need to demonstrate stable growth and profitability to justify elevated stock valuations. Apple and Amazon report earnings Thursday, followed by ExxonMobil and Alphabet next week.
If high-profile companies like these falter on earnings, it could upset the market’s momentum and end the S&P’s record run. For now, bulls remain in control as solid tech profits power stocks to new heights. But further gains likely hinge on the Fed’s next move.
Individual Stocks That Led S&P 500 to New High
A handful of top-performing large cap stocks have provided an extra boost driving the S&P 500 to unprecedented levels:
- Nvidia (NVDA) – The graphics chip powerhouse has seen its stock price surge 16% year-to-date based on strong data center and gaming sales. Nvidia is expanding beyond its core PC business into artificial intelligence, self-driving vehicles, and the metaverse.
- Tesla (TSLA) – Shares of the leading electric vehicle maker have accelerated 10% to start 2023. Tesla posts Q4 earnings after the closing bell Wednesday, with CEO Elon Musk hinting the company may unveil a new vehicle model.
- Microsoft (MSFT) – The tech titan’s stock sits up 8.3% amid optimism around its acquisition of Activision Blizzard and growing cloud services business. Quarterly results beat on both the top and bottom lines.
- IBM (IBM) – Big Blue’s shares have climbed 5.4% on the back of better-than-expected earnings and revenue. IBM’s hybrid cloud and AI initiatives drove solid growth.
These tech winners have propelled the S&P 500 to historic highs to kick off 2023. Their continued success along with dovish Fed policy could determine whether the index extends its record run through the year.
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