Stocks closed at all-time highs in a cautious session that saw traders gearing up for Jerome Powell’s testimony to Congress and the start of the earnings season.

With a mere 0.1% advance, the S&P 500 notched its 35th record this year. Some of the largest American banks will unofficially kick off the second-quarter reporting season Friday - and expectations are on the rise. Analysts’ upgrades to profit estimates have outnumbered downgrades. At the same time, forecasts for 12-month forward earnings stand at an all-time high.

John Stoltzfus at Oppenheimer Asset Management said a robust earnings outlook and a resilient economy could support higher valuations. He raised his year-end S&P 500 target to 5,900. At Goldman Sachs Group Inc., Scott Rubner says the bar for corporate results is high - with lofty expectations already baked in.

“As earnings season kicks off this week, investors should be prepared to see some ‘choppiness,’ but the market will likely climb back up again once companies resume buybacks,” said Mark Hackett at Nationwide.

The S&P 500 topped 5,570. Nvidia Corp. climbed as UBS Group AG raised its target. More than 2,600 Boeing Co. 737 jets registered in the US will need to have their oxygen generators inspected. United Airlines Holdings Inc. said another of its Boeing aircraft lost a main landing gear wheel while taking off. Broadcom Inc. borrowed $5 billion in the investment-grade market.

Shorter-term Treasuries underperformed longer ones. Bitcoin slid on concern about possible sales of the token by creditors of the failed Mt. Gox exchange. 

The lack of a clear winner in the French elections spurred speculation there’s unlikely to be major policy changes amid political gridlock. Meantime, US President Joe Biden pledged to fellow Democrats he’ll remain in the presidential race.

Traders should brace for a correction in the stock market as uncertainty swirls around corporate earnings, Fed policy and the US presidential campaign, according to Morgan Stanley’s Mike Wilson. 

The third quarter is “going to be choppy,” Wilson told Bloomberg Television.

“This rally has continued despite growing concerns about the economy, political uncertainty, sticky inflation and lack of clarity about timing of first rate cut,” said Megan Horneman at Verdence Capital Advisors. “Therefore, we would not rule out at least a 10% correction in the S&P 500 in the second half of the year. Especially when we see future earnings expectations get more realistic.”

For the past two years, a small cohort of companies have contributed to the bulk of the gauge’s return: The S&P 500 has gained roughly 55% since the lows of October 2022 - but 58% of that advance has come from just the top 10 stocks in the benchmark, according to data compiled by Bloomberg.

“S&P 500 earnings growth will likely continue for the next year at a respectable pace,” said Nicholas Colas at DataTrek. “Moreover, those improvements should be broad-based rather than in just a few tech-heavy sectors. All this adds up to continued strength in US large caps.”

The S&P 500 is in its 11th-longest stretch without a 2% down day since 1928, according to Ed Clissold at Ned Davis Research. 

“The end of previous long streaks has been followed by mixed returns, but not the end of the bull market, on average,” he noted. “Never (OK, rarely) short a dull market.”

Clissold also noted that this is one of the “hardest bull markets” for stock pickers in the last 50 years.

“What makes the current cycle unique is that so few stocks are driving returns, providing fewer opportunities for stock pickers to outperform than during previous low vol streaks,” he concluded.

Aside from the corporate world, traders will continue focused on the Federal Reserve outlook.

Powell will face pressure this week from lawmakers growing impatient for the Fed to cut rates and others who are unhappy with its latest plan to boost capital requirements for Wall Street lenders. The Fed chair heads to Capitol Hill on Tuesday and Wednesday for his semiannual testimony.

Also the June consumer price index data due Thursday will be a highlight. The so-called core CPI, which is seen as a better measure of underlying inflation, is expected to rise 0.2% for a second month. That would mark the smallest back-to-back gains since August.

“While the CPI release will be key, we will be looking for signs from Powell that the Fed is edging closer to a decision to cash in its chips and move in September provided ongoing inflation news broadly confirms that the run-rate has stepped back down,” said Krishna Guha at Evercore.

US consumers’ near-term inflation expectations fell for a second straight month, a Fed Bank of New York survey showed.

If US inflation moderates without collateral damage to the economy, the resulting Fed easing cycle could be a tailwind for risk assets, according to Jason Pride and Michael Reynolds at Glenmede.

“Synchronized global easing cycles have historically been a bullish signal for equities in the short-to-medium term,” they noted.

The S&P 500 has posted forward returns of 9.9% in the 12 months immediately following periods of 40-60% of global central banks easing policy, Glenmede said. That number increases to 18.7% in the 80-100% tranche - suggesting that equities could benefit if more central banks hop on the easing bandwagon.

“The Fed is closing in on rate cuts, as the US economy moderates,” according to Principal Asset Management strategists. “We expect cuts in September and December, but that will require additional evidence of a slowdown.”

Bond markets appear to be beginning the back half of 2024 with a long bias, as economic data weakens and we approach rate cuts in the fall, according to Thomas Tzitzouris at Strategas. Despite the long positioning, there are preliminary signs of shorts coming back, he noted.

“When we break down the positioning data, we see a market that despite showing a long bias in anticipation of cuts, is not fully convinced this will occur with shorts slowly returning to the market,” Tzitzouris said.

  - Bloomberg