Wall Street’s enthusiasm for stocks faded as many traders were reluctant to keep piling in after a solid rally in early May.

The S&P 500 closed little changed, remaining below the 5,200 mark that it briefly touched this week. Tesla Inc. and Google’s parent Alphabet Inc. led losses in megacaps. Intel Corp. slumped as the chipmaker weakened its revenue outlook after a U.S. ban on chip exports to Huawei Technologies Co. Treasuries remained lower after a US$42 billion sale of 10-year bonds saw tepid demand. 

“All of these ingredients create a perfect recipe for an excuse for investors to take a step back after the recent bounce and reassess things,” said strategists at Bespoke Investment Group.

Lack of conviction among investors to buy into the recent bounce in U.S. stocks shows the market is far from turning fully bullish, said Citigroup Inc. strategists. The recent unwind of short positions has left the S&P 500 close to one-sided net long, but investors appear hesitant to add to the existing bullish positions, a team led by Chris Montagu noted.

“Flows tell a story of limited enthusiasm with a trickle of new long positions and only marginal increase in risk appetite,” Montagu said.

The S&P 500 hovered near 5,190. Treasury 10-year yields advanced three basis points to 4.49 per cent. The dollar rose.

Following a pullback last month, equities resumed their advance in early May as solid corporate earnings bolstered sentiment and speculation grew that the Federal Reserve will be able to cut rates this year. The recent rally brought the S&P 500 about 1 per cent away from its all-time high. 

Still, the bounce off April’s lows has been a narrow one, noted Matt Maley at Miller Tabak + Co. 

“That’s not the end of the world,” he said. “But it would be a lot more positive if this rally can broaden out over the coming days and weeks — given that the market is a lot more expensive than it was at this time last year.”

A surge in the S&P 500 since the end of October through April had pushed the equity gauge to trade at 20 times projected profits, some 11 per cent above its 10-year average. Traders are now looking for reasons to justify the high valuations and want to see bigger growth ahead.

The recent stock rally signaled that traders are more driven by “fear of missing out” than confidence about fundamentals as there is still uncertainty as to where earnings go from here and few market catalysts on the horizon, according to David Bahnsen, chief investment officer at The Bahnsen Group.

“With no rate cuts possible until July and not likely until September, and the next earnings season two months from starting, there are no apparent catalysts to change the near future direction of stocks other than speculation around what various data points,” he noted.

Inflation figures due next week will offer fresh insights about the U.S. economy after employment data out Friday showed the labor market is cooling. Fed Bank of Boston President Susan Collins signaled Wednesday that interest rates will likely need to be held at a two-decade high for longer than previously thought to damp demand and reduce price pressures.

“Despite the lack of good news on inflation, there is a silver lining for patient investors,” said Mark Hackett at Nationwide. “As the Federal Reserve extends the timeline for interest rate cuts, historical data shows that longer Fed pauses often correlate with better equity returns. This should give investors reasons to be optimistic.”

Indeed, longer pauses have been constructive for equities, according to a study conducted by Ryan Grabinski at Strategas.

“The longest pause from June 2006 to September 2007 was associated with the best equity market return,” he noted. “We are reaching the point where a Fed cut is probably more likely to mean issues are perking up.”

Robust corporate earnings will continue to lift the S&P 500 to 5,500 by the end of this year as profit margins improve, according to Societe Generale SA.

“Profits are the glue in this cycle,” the firm’s head of U.S. equity strategy Manish Kabra wrote, adding that 2024 should be considered “an inflationary year, rather than stagflationary” as earnings-per-share growth is poised to accelerate further.

S&P 500 companies crushed earnings-growth expectations again in the first quarter, driving upward momentum in consensus for top and bottom lines, but guidance suggests a heavy dependence on margin to meet future expectations, according to Gina Martin Adams at Bloomberg Intelligence.

“Earnings are well on the recovery path now that the 2022-2023 earnings recession is past, and they should return to double-digit growth with widespread participation later this year,” she noted. “However, sales growth is expected to hover in the low-to mid-single digit range through 2026, suggesting the earnings recovery is so far mostly about margin expansion amid cost-cutting and easing inflation pressures.”

There’s been a resurgence of earnings per share as several industries emerge from “EPS rolling recessions,” according to Erin Browne and Emmanuel Sharef at Pacific Investment Management Co. That means different equity sectors experience earnings downturns at different times and then recover, one after the other, over a span of several quarters.

The growth sector of the S&P 500 — dominated by technology — went through an EPS recession in 2022 and then recovered in 2023 — while most other sectors’ EPS were contracting. 

“As we progress through 2024, we expect defensive and cyclical stocks will emerge from their earnings contractions, potentially leading to significant price appreciation,” they noted. “Macro trends and supportive bottom-up signals have us modestly overweight equities in multi-asset portfolios.”

Against a backdrop of slowing job growth and slumping consumer confidence, investors will now turn their focus to the earnings of retailing giants like Walmart Inc. and Target Corp. to gauge shoppers’ spending habits. 

Both firms are due to report over the next couple weeks, with the potential to sway expectations for economic growth and retail shares, which are trailing the broader market in 2024.

Meantime, utility companies are beating the S&P 500 at a blistering pace since the equity benchmark bottomed last month, a defensive shift that poses a roadblock for the bulls in the short-run if traders are using bond-proxy sectors as leadership stocks.

The utilities sector, which includes companies providing electricity, water and gas that are known for their consistent dividend payments, has climbed by 11 per cent in 15 sessions through Tuesday — a sizzling rate that was last exceeded in the depths of the pandemic in 2020, according to data compiled by Bloomberg.

Corporate Highlights:

• Uber Technologies Inc. reported gross bookings in the first quarter that missed analysts’ estimates with softer-than-expected demand in Latin America and earlier holidays weighing on orders.
• Lyft Inc. reported first-quarter results and financial guidance that beat investors’ expectations, a sign of the company’s ability to retain and attract new riders in the US and Canada.
• Rivian Automotive Inc. fell short of Wall Street’s earnings expectations to start the year as the automaker pursues a costly effort to revamp its manufacturing operations and boost output of electric vehicles.
• Shopify Inc. shares tumbled after the Canadian e-commerce company pledged to continue investing in marketing even though doing so will pinch profits.
• Chinese iPhone shipments jumped about 12 per cent in March after Apple Inc. and its retailers slashed prices, official data showed, suggesting efforts to arrest an accelerating decline in sales are yielding early results.
• Pfizer Inc. has agreed to settle more than 10,000 cases accusing it of hiding the cancer risks of its Zantac heartburn drug, according to people familiar with the deal, the biggest of the litigation.
• Reddit Inc. jumped as improvements to the social-media platform’s advertising system helped push quarterly sales higher than expected in its first results as a public company.
• Brookfield Asset Management reported its first quarterly decline in profit since it spun out of its parent company amid a drop in fees from some permanent capital vehicles.

Key events this week:

• Bank of Japan issues summary of opinions from April policy meeting, Thursday
• China trade, Thursday
• U.K. BOE rate decision, Thursday
• U.S. initial jobless claims, Thursday
• U.K. industrial production, GDP, Friday
• ECB publishes account of April policy meeting, Friday
• BOE Chief Economist Huw Pill speaks, Friday
• U.S. University of Michigan consumer sentiment, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average rose 0.4 per cent
• The MSCI World index fell 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro was little changed at $1.0745
• The British pound was little changed at $1.2497
• The Japanese yen fell 0.6 per cent to 155.62 per dollar

Cryptocurrencies

• Bitcoin fell 1.3 per cent to $62,180.27
• Ether fell 1.6 per cent to $3,000.6

Bonds

• The yield on 10-year Treasuries advanced three basis points to 4.49 per cent
• Germany’s 10-year yield advanced four basis points to 2.46 per cent
• Britain’s 10-year yield advanced one basis point to 4.14 per cent

Commodities

• West Texas Intermediate crude rose 1.1 per cent to $79.21 a barrel
• Spot gold fell 0.2 per cent to $2,309.04 an ounce