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Stocks reclaim record highs, but investor enthusiasm is lacking

Key Points
  • Two major stock indexes have returned to all-time highs, but the market is missing some of the enthusiasm that often accompanies new highs.
  • Analysts expect the market to continue heading higher for now, with earnings a potential driver.
  • One of the next big tests for stocks will be whether the Fed sounds more hawkish after its meeting next week, now that the stock market has reclaimed its highs.

Stocks have reclaimed their old highs and should continue to make new ones, but without some of the fanfare and excitement of some past rallies.

The S&P 500 and Nasdaq surpassed their September closing highs on Tuesday after a string of solid earnings news. The Dow closed about a percent away from its high, at 26,656.

"We've essentially just gone back to September. People look at this 17% year-to-date move and say it seems like an unsustainable trend. We have to keep in mind we're now flat to where we were back in September," said Jack Ablin, CIO of Cresset Wealth Advisors. "This is just taking back the correction. Putting it in that context, I would say I'm not as worried about the market as a lot of people. In the earnings reports, there were some blockbuster surprises."

T3Live.com's Scott Redler said investors continue to doubt the market, even as some indexes hit highs.

"The sentiment is typically not bullish," he said. "Everyone is worried about ... trade wars, while passive money comes in and the market marches higher."

Redler, who watches the short term technicals, said the S&P first pressed the 2,900 level as earnings season started. The so-called FAANG stocks — Facebook, Amazon, Apple, Netflix and Google-parent Alphabet — rallied, and that helped lead the market. Now those names and related tech favorites are the ones to watch when Facebook and Microsoft report earnings Wednesday afternoon, followed by Amazon on Thursday.

Beyond that, the market will also soon be tested by the Fed, which meets May 1. Redler said stocks have been moving higher since the Fed "pivot," when officials started to signal that more interest rate hikes were unlikely. Some market pros believe the Fed will even cut interest rates before it ever raises them again.

'Powell's rally'

"With the market at highs, what will the Fed do? You can't have an uber dovish Fed with the market at record highs," Redler said. "This was [Fed Chairman Jerome] Powell's rally. Will he snuff it out?"

The S&P 500 closed at 2,933, just 7 points from its September intraday high of 2,940. "Things look good. The small caps turned up, and they've been a laggard. Every level has been met with skepticism versus excitement. But things have been acting well and trading well. Every time the market pauses, there's a grudge match between the bulls and the bears. Now we're at 2,940 which is the next obstacle," said Redler.

Once the market takes back 2,940, Redler said the next level will be the psychological 3,000, the year-end target of many market strategists.

"We tend to advance by an average of 10% before falling into another decline of 5% or more," said Sam Stovall, chief investment strateigst at CFRA. "I think we'd have to start seeing earnings projections for the full year start to rise in order for that to happen."

Some analysts had been expecting a ho-hum earnings season for the market because it was expected to be the first quarter of declining profits since 2016. But the earnings have been better than expected, and earnings so far look to be down just over 1%, and that could improve further — even to the point of being positive, some say.

"Granted expectations were as low as a limbo stick," said Ablin. "My original thought was let's focus on the economy because earnings aren't going to be anything to write home about. Earnings are doing better than I would have thought. It depends on the margins, but a number of companies are able to raise prices. Whirlpool was a huge beat out of nowhere. Wages are up 3.5%. I think there are some discretionary dollars out there. "

In addition to Whirlpool, several other companies discussed improved pricing, like Procter and Gamble and Kimberly-Clark.

"Compared to last quarter, everyone thought the world was going into a global recession, and when the yield curve inverted there was a lot of arm flapping about that," said Abline. "I think it's slow and steady. My guess is we're not going to make a fortune here, but it doesn't' sound like the bottom is going to fall out. I'm happy to watch paint dry."