US stocks rallied to a record high on Thursday as investors digested a wave of corporate reports amid rising inflation expectations.
The S&P 500 index rose 0.2%, while the Nasdaq 100 added 0.6% as investors turned their attention to company earnings for more details on price pressures. Tesla Inc. rushed to record highs after the ninth straight quarter of record earnings.
A strong start to the reporting season helped allay inflation concerns. However, stocks of companies, that fell short of estimates, had an impact on the core index, which was practically unchanged for most of the day. Investors have done little to reward the majority of S&P 500 companies that have beat expectations so far while severely punishing those who have underperformed.
"I think it's OK that investors are looking at earnings and going through them with a very fine-toothed comb," Liz Young, head of investment strategy at SoFi, said on Bloomberg's "QuickTake Stock" streaming program. "We're in a time-period where we are finally, it seems like, going to shift away from markets that are driven by monetary policy and back to markets that are driven by fundamentals."
Market-implied expectations for US inflation for the next half-decade surged to the highest in 15 years as investors hedged against the risk that consumer-price pressures fail to abate.
The five-year Treasury yield climbed above 1.21%, the highest since February 2020, as traders increased their bets the Fed may tighten policy sooner than expected. Solid economic reports on Thursday also strengthened predictions. The latest jobless claims report unexpectedly declined to the lowest since March 2020. Sales of previously owned US homes also rose in September by the most in a year.
Meanwhile, Congressional Democrats are at odds over both the tax and spending aspects of President Joe Biden's economic package.
"Good jobs plus high inflation creates a significant one-two punch against the Fed's accommodative stance," said Mike Loewengart, managing director of investment strategy at E*Trade Financial. "Easing and even rate increases down the road could start to be accelerated if we see more momentum like this, which perversely could create headwinds for the market."
With stocks at highs, traders are braced for swings in the market while also keeping a close eye on company margins, pricing power and outlooks.
Events to watch this week:
- release of Germany Manufacturing Purchasing Managers' Index
- a summit of European Union leaders
- Fed Chair Jerome Powell takes part in policy panel discussion