Small caps have ridden the wave, setting new highs in the past week, but the broader market did not, with the S&P 500 ending the week at 2,181, up 0.8 percent but 9 points below its record close. The small cap Russell 2000 was the star performer, up 2.5 percent for the week at a record 1315. The Russell is now up 10 percent since the election and has been up 11 days in a row for the first time since 2003.
"I think we meander more than we press new highs, because I think we're going to see unwinding of some of the stretched trades," said Art Hogan, chief market strategist at Wunderlich Securities. He pointed to the 11 percent gain in the S&P financial sector and the 5 percent jump in industrials since the election. The S&P 500 is up 2 percent in the same time frame.
Deutsche Bank chief equity strategist David Bianco said he has become more bullish on a stocks as a result of the election. He changed this year's S&P 500 target to 2,200 from 2,150 after the election. Bianco said he expects stocks to continue to run. He now expects the S&P could reach 2,350 in 2017, and 2,500 by 2018, before the bull market ends.
"I'm quite constructive. I think the S&P is going to get over 2,200 real soon, and I think it gets to 2,250 around the inauguration," he said. Bianco said the fact that the incoming Trump administration has put corporate tax cuts at the top of its agenda is a major positive.
"We estimate that every five points of the structural tax rates reduction would boost profits in the S&P 500 by about 4 percent," he said. Trump proposes a 15 percent tax rate from the current 35 percent, but Bianco said even a 25 percent rate would be a big plus. Domestic industries would benefit more than those with a lot of overseas profits, he said.
So far, the market has celebrated the reflation trade and has not focused on the protectionist comments from Trump that spooked some of Wall Street before the election. Bianco does not expect that to become an issue when Trump unrolls his trade policies, but if it is he said it would be the multinationals that would take the biggest hit.
Hogan said it helps that the Trump transition in markets comes as economic data was beginning to look better. "The economic data is important and the Fed is only talking about raising rates two times next year," he said, adding that bond yields may be moving too quickly. He said the move in the dollar makes more sense, and its potential impact on multinational earnings has not yet started to worry the stock market. "We will change our tune if it continues at the pace it's going," he said.
The 10-year Treasury yield pushed higher in the past week, trading at 2.35 percent late Friday.
Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, said the 10-year yield is at an important balancing point. It is at a level – 2.30 to 2.35 - that it was at late last year when the markets believed the economy was improving and the Fed was going to hike rates four times in 2016. But weakness in China, Brexit and other factors intervened, and the Fed now is only on track to hike once this year, in December.