The stock market records just keep coming. The Dow Jones Industrial Average closed above 40,000 for the first time Friday. The popular S&P 500 index hit an all-time high Wednesday — its 23rd record close this year and a phenomenal rebound from last year, when the index had no record closes. This bullishness is a clear sign that investors believe the United States will experience a “soft landing,” with inflation continuing to cool off and the economy continuing to grow.
It took a while for optimism to take hold. At the start of last year, many prominent Wall Street voices predicted a recession or, at minimum, a sharp slowdown. Neither scenario materialized. Instead, the U.S. economy has kept outperforming expectations. Consumer spending remains robust, and business spending has picked up again. All this helps explain why nearly 80 percent of companies in the S&P 500 beat earnings expectations. Even inflation, which looked worrisome again earlier this year, seemed more manageable in April. Fewer companies even mentioned inflation on their latest calls with investors.
Wall Street’s mind-set began to shift in late October, when artificial-intelligence mania took hold. Suddenly, AI tech stocks took off, led by Nvidia, which has surged nearly 90 percent in the past six months. The AI boom was aided by a growing belief that the Federal Reserve would cut interest rates several times in 2024, fueling more investment across the economy and reviving the real estate sector. By March, it all seemed a little too good to be true. Progress on inflation had stalled, and the “Magnificent Seven” tech stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — were playing an uncomfortably large role in market gains. Some rightly asked, Is this a bubble?
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I’ll admit I was a little worried, but events since March show sanity returning. The market pulled back in April. It was down only about 6 percent, but this was enough for investors to pause and reassess. People again looked closely at earnings and the economic fundamentals. This is why the recent record highs for the Dow and S&P 500 are being driven by a lot more than tech stocks. Last year, the Magnificent Seven made up an eye-popping 60 percent of S&P 500 gains. So far this year, they account for 47 percent, according to Howard Silverblatt of S&P Dow Jones Indices. Similarly, the biggest contributors to the Dow this year have been the manufacturer Caterpillar and the financial firm Goldman Sachs. When the list of stock winners grows, it’s a healthier rally.
Stocks remain pricey. You don’t have to be a trader to recognize that prices are high compared with historical norms. It’s also notable that utility stocks are suddenly surging as investors realize that the AI boom (and President Biden’s big push for U.S.-made semiconductors) will require a lot more energy. And although analysts’ predictions that earnings will keep growing in 2025 and 2026 count on more positive surprises — which are far from certain — there’s a difference between pricey stocks and a bubble.
Follow this authorHeather Long's opinionsToday’s tech companies are highly profitable, and that’s a key difference from the late-1990s dot-com bubble, when money was pouring into start-ups that had yet to earn anything. As Sam Stovall, the chief investment strategist at CFRA Research, told me, “It’s frothy, but I wouldn’t say it’s early 2000 all over again.” There’s also some comfort from history. As Bespoke Investment Group points out, bull markets last 1,011 days, on average, with a 114 percent gain. The current bull market is just over 580 days old and is up about 50 percent.
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Meanwhile, the U.S. economy is showing signs of returning to a normal, steady-growth path. There’s no question that many Americans remain upset about higher prices, but they continue to splurge here and there, especially on vacations and other experiences. It helps that wage growth has outpaced inflation for the past year, meaning Americans are starting to come out ahead.
The stock market is not the economy, but the record highs help the nearly 60 percent of households that have some money invested (mainly via retirement accounts). For most Americans, continuing to save and invest small amounts each month is a wiser approach than trying to time the market highs and lows.
The biggest lesson of all from Dow 40,000 is that betting on the United States has been a terrific strategy. Only four years ago — in March 2020 — the world was entering a global pandemic and possibly a depression. The Dow sank below 20,000. But dramatic action from the Federal Reserve and Congress enabled a rapid recovery in markets and the broader economy. Companies innovated, and workers moved into jobs that better suited their skills and goals. This wasn’t all smooth, and there remain pockets of real pain, but many positive surprises are still happening.
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