The Stock Market’s Historic Rally, Explained

The stock market has been on a tear lately.

The S and P five hundred of about six tens of one percent again five up days in a row, the longest winning streak of the year, the best winning streak since the middle of December.

This past Friday, the SMP five hundred closed at an all time high for the first time in two years.

Go back to the S and P five hundred, It has been five hundred and fifteen days since we last had a record high on the benchmark US Index or reclamation of that I and all.

This seems to be at odds with some of the economic predictions we had been hearing.

Basically, everyone was expecting, if not a caamity, certainly a recession. What's happened since then is just sort of a steady slog of evidence against that being the case.

This is Chris Naji. He's the senior executive editor for the Bloomberg Markets team. Today on the show, we'll talk to Chris about what's behind the S and P five hundred's record numbers, how we got here, and why a group of stocks called the Magnificent Seven has a lot to do with it. I'm your host Sarah Holder and This is the big take from Bloomberg News. At the beginning of the year, our colleague Sam Potter gave us an overview of what investors had expected for Wall Street this year.

Basically, the consensus on Wall Street at the moment is that the interest rate hikes that we've seen over the last eighteen months to two years, they're finally going to start to bite properly, finally going to start to put the brakes on the economy. So we're going to see some economic slowdown, but it's not going to be It's not expected to be extreme.

But if you look at the stock market right now, some slowdown isn't exactly what's happening.

We've just basically eliminated the decline that started at the beginning of twenty twenty two.

But Chris says Wall Street investors had valid reasons to believe some type of slowdown was in our future. Part of the reason they were worried was because of what the Federal Reserve was doing.

You don't fight the Fed, it's the classic slogan. And when the Fed is being as aggressive as it was, generally bad tithings are in store for the market. So I think people were sort of buying the pundit class view that there was no chance of the market going anywhere as long as the FED was fighting inflation as aggressively as it was, So probably the best thing to do when that's going on is just sort of predict maybe a middle of the road year.

And Chris says another thing that added to that expectation of a slowdown was the regional bank crisis the country faced last spring.

People were really convinced that the FED was creating lasting problems for the economy, and then suddenly, while you had this rocket fuel that hit right at sort of the worst time.

When you as regional lenders Silicon Valley Bank and Signature Bank collapse in March, there was hope they would be just one offs, but the turmoil quickly spread to.

Others last March when you had all this sort of quasi banking crisis in the US, and it looked very much at that point like both the economy and the stock market were in big trouble. Anytime you've got banks going out of business, that's really the worst thing that investors and macroeconomists can see.

So the consensus view amongst Wall Street investors was that all this. The fed's moves, the regional bank crisis, combined with other indicators, meant we were headed for trouble. But it's important to point out that not everyone shared this view. There were people who said, hold on, I don't think it's going to play out like that, and so we put in this target.

People thought we were a little bit nuts, and then the market just kept going up.

That's John Stolfus, managing director of Oppenheimer and Company, an investment firm based in New York. John says he and his team were watching the FED news just like everyone else, but they saw the fed's actions differently.

But we were back in December looking at this. How we differentiated ourselves from the rest of the crowd.

Was that most of the street was acknowledging that it was the end of easy money. We called it the end of free money. But they looked at it it is a bad thing. We looked at it as a good thing. And the reason why we felt it was a good thing was for years now, since the financial crisis, for most of the period, they were raising rates, okay to bring rates up, and.

So what was happening is now we looked at it and we thought well where we are now. All of a sudden, bond issuers have to pay for the privilege of borrowing money and bond buyers get something in return.

So with that in mind, we didn't think the FED cycle would be anywhere near as disruptive as people were suggesting.

On top of that, John was also watching as a new type of technology started to break through and grab widespread attention.

It was last March when the story of AI really broke. I think that there was new levels of.

AI, and it was around the time that we were dealing with the problem in the regional banks, and all of a sudden, this was what captured the market and then created the first of the series of the big rallies that carry us through twenty twenty three.

After the break, we'll look into the role AI has played in boosting the stock market and where things might go from here. Welcome back to the Big Take from Bloomberg News. Before the break, we were talking about why some investors didn't see the current stock market rally coming. Now we want to dive into what's causing it. One thing that's been talked about a lot is the rise of AI. We asked Chris how much of the current gains we can attribute to that.

Another big theme of the market was the concentration of games and the Magnificent seven AI fueled gigantic tech stock.

Tell us more about the Magnificent Seven.

These are stocks that, really, long before this year, have been the main contributors to the stock market's health in the US and really, in many ways, the country's economic health. They're so huge. They are the providers of products that basically define American life right now at various levels. So to say, Okay, the Magnificent Seven are a phenomenon traceable to a hype cycle or sort of sudden craze for

But as Chris points out, there are a couple of reasons not to look at this as just a hype cycle in one part of the market.

One of them is that even if it's only a handful of stocks, they represent a gargantuan amount of market caps. Then there's another argument that the whole, the broad spectrum of American commerce is going to be a beneficiary, for

Shares of the seven largest tech stocks have doubled in the last year thanks to optimism about the promise of AI. Of course, that's just part of the story. Falling inflation, the hope for future interest rate cuts, and a rebound in current earnings are also fueling the market's current run. But Chris says, even with all that happening, it's important to look at that bigger picture and the possibility that this current run might not be as dramatic as it looks.

It's interesting if you take sort of the slope of earnings starting take a year before that, anyone knew what the pandemic was twenty eighteen twenty nineteen. And this is true of stock prices too. Yes, they did these really brutal contortions twenty twenty through twenty twenty three. But the slope, if you just take the endpoint now and the start point in twenty twenty eighteen, it's really very conventional. It's basically a six or seven percent gain in earnings over

Thanks for listening to the Big Team from Bloomberg News. I'm Sarah Holder. This episode was produced by Adriana Tapia. It was edited by Caitlin Kenney and William Selway. It was mixed by Alex Sugiura. It was fact checked by Stacy Renee. Our senior producers are Naomi Shaven and Jildia Di Carli. We get editorial direction from Elizabeth Ponso. Nicole Beemster Borr is our executive producer. Sage Bauman is our head of podcasts. Special Thanks to Chris n Age and