Stock traders decided to take some chips off the table at the start of a week that will bring the Federal Reserve’s preferred inflation measure - on a day when markets will be closed.

Equities pulled back after a rally that drove the S&P 500 to multiple records, spurring speculation the market has gone too far, too fast. Investors also took a cautious stance on bets the personal consumption expenditures price index - due on Good Friday - will show inflation probably remained uncomfortably high. On that same day, Jerome Powell is due to speak.

A sense of prudence also prevailed as concern about a disconnect between earnings expectations and share prices have grown. Morgan Stanley and JPMorgan Chase & Co. strategists were the latest to warn it’ll be hard to justify lofty valuations if profit acceleration fails to materialize.

“We continue to see sentiment as stretched and think a US equity market pullback is overdue,” said Lori Calvasina at RBC Capital Markets.

The S&P 500 fell below 5,220. Intel Corp. slipped on a news report China is limiting the use of foreign chips. Boeing Co. climbed after announcing that its chief will step down. Treasury 10-year yields rose five basis points to 4.25%. Bitcoin topped $70,000.

In a sign of how overheated the stock market has been, the S&P 500 finished last week 14% above its 200-day moving average.

“That’s quite stretched historically,” said Jonathan Krinsky at BTIG. “The big question is: do we get a correction through time, or price. The latter has been elusive for the last five months, but we do think there is a window here for some modest price weakness.”

Last week also saw the most amount of S&P 500’s 52-week highs in nearly three years, according to Krinsky. 

“While this rarely marks a final high, the near-term returns are much more mixed than you might imagine, with similar surges happening prior to large drawdowns in ‘18 and ‘20, while also amidst strong uptrends during ‘17, ‘20, and ‘21,” Krinsky noted.

Concerns about a near-term overbought market have surfaced at a time when consensus earnings estimates have been revised lower. 

Analysts currently expect earnings-per-share to grow about 9% this year versus 11% at the start of November, according to data compiled by Bloomberg Intelligence.

“The stock market faces its next test in a few weeks when earnings season begins in mid-April,” said Clark Bellin at Bellwether Wealth. “Stock prices and valuations are elevated heading into this next earnings season, which leaves little room for disappointment if companies fail to deliver strong earnings.”

Investors looking to put new money to work in the market should wait for a pullback, Bellin added.

“The market already had a few minor pullbacks so far this year,” Bellin also noted. “They were shallow and quick, but they proved to be good buying opportunities.”

The combination of healthy US economic data, expectations the Fed will cut rates and optimism about artificial intelligence have all driven the S&P 500 up almost 10% this year - leaving many year-end forecasts in the dust. 

Goldman Sachs Group Inc. strategists are sticking with their year-end prediction of 5,200 - but have a scenario in which tech megacaps lead the index up to 6,000.

“Although AI optimism appears high, long-term growth expectations and valuations for the largest TMT stocks are still far from ‘bubble’ territory,” the strategists led by David Kostin wrote.

The pro-risk mood among equity investors is likely to spread beyond the megacap technology names that have comprised much of the stock market’s returns into other sectors, according to strategists at BlackRock’s Investment Institute.

Strong corporate earnings, economic resilience in the face of higher interest rates and “prospects for innovation” have prompted Oppenheimer Asset Management’s John Stoltzfus to raise his year-end target on the S&P 500 to 5,500 - joining Societe Generale for the highest forecast on Wall Street.

“The big surprise this year has not been so much the resilience of the economy, but rather the substantial capitulation among the bears and bearish community,” Stoltzfus said. Profit taking, particularly in Big Tech, is expected and normal - and any near-term volatility is opportunity to “catch babies that get thrown out with the bath water,” he noted.

  - Bloomberg