The Stock Market Heads for a New High. Its Foundation Is Starting to Crack.

That the indexes remained that strong seems surprising given the flood of news markets had to deal with during the week. For one, Federal Reserve Chairman Jerome Powell informed investors that they shouldn’t expect a rate cut in March, a more hawkish statement than was expected. That’s not what many expected to hear, and it caused the S&P 500 to drop 1.6% on Wednesday.

The Fed’s caution was understandable in the light of Friday’s payrolls report, which came in red hot. The U.S. economy added 353,000 jobs in January, well above FactSet’s forecast for 176,500. That will only add to the concerns that the economy remains too hot for the Fed’s liking. What’s more, the Atlanta Fed’s GDPNow tracker put U.S. economic growth at 4.2% before the release. No sign of a recession there, but also not exactly the kind of data that would prompt the Fed to act.

“We’re not looking at early and often [for rate cuts], but a more moderate pace and a little bit later,” says Chris Harvey, chief U.S. equity strategist at Wells Fargo Securities. “We’re going to have a repricing of equities in the short-term.”

It’s possible that strong economic growth can offset the Fed. What it can’t do is make up for Big Tech, which has been driving the market higher this year—though the latest earnings reports were mixed.

Alphabet’s
earnings were the biggest disappointment. They beat by just 3%, causing the stock to drop 6% from Tuesday’s close through the end of the week.
Microsoft’s
Tuesday evening earnings and
Apple’s
report on Thursday weren’t quite good enough, either, with the stocks finishing the trading day following their results lower.

Those disappointments were offset by
Amazon.com,
which was up 7.9% on Friday after reporting on Thursday evening, and particularly by
Meta Platforms,
which soared 20% and was alone responsible for about 40% of the S&P 500’s gain this past week.

The rest of the market, though, had a mediocre week, with 271 stocks finishing higher and 231 lower. What’s more, the
Invesco S&P 500 Equal Weight
exchange-traded fund was unchanged on the week, not exactly a sign of strength. Looking at this year’s numbers tell a similar story, with almost half of the stocks in the S&P 500 down for the year.

If tech stocks can’t resume their winning ways, the stock market could be set up for a fall—even with the S&P 500 trading near a record.

“Breakouts on weak…participation (market breadth) should be viewed with skepticism until proven otherwise,” writes Craig Johnson, chief market technician at Piper Sandler.

And even new highs can’t guarantee that the market keeps rising. In early 2022, the S&P 500 hit a new high, only to drop—hard—as the market had underestimated the Fed’s resolve to cool down the economy. A drop now might not turn out as badly as it did two years ago, but the market could still experience a rough patch in the weeks ahead.

With so much pushing and pulling going on, it’s hard to know just what will win out. Does the market need rate cuts? Can faster growth offset restrictive policy outlook? Can something pick up the baton from the Big Tech or will Amazon and Meta have to continue doing the heavy lifting? It all points to a market that might be more fragile than it looks.

Remember, the good times can keep rolling on—until they don’t.

Write to Jacob Sonenshine at [email protected]