The rally that has powered stocks in May struggled gain much traction on Tuesday, with investors split on whether the market can sustain the advance given all the economic crosscurrents.

Equities are set for a consolidation amid stretched positioning, according to JPMorgan Chase & Co. strategists. Meantime, a pair of contrarian sentiment indicators from Bank of America Corp. and Citigroup Inc. are on the cusp of levels that say it’s time to snap up shares. And Goldman Sachs Group Inc. said Commodity Trading Advisors have lifted their stock exposure and are expected to keep buying regardless of the market direction this week.

Stocks have been trying to make a comeback after April’s rout, with gains fueled by prospects of Federal Reserve rate cuts and solid earnings. While the S&P 500 recently broke above a key technical level, Matt Maley at Miller Tabak + Co. says he’d like to see a bit more upside follow-through to confirm the “break.”

“We continue to see a path higher for stock prices as long as fundamental conditions remain stable and profit growth remains on a positive trend,” said Anthony Saglimbene at Ameriprise. “Elevated interest rates and sticky inflation, along with the Fed holding monetary policy at restrictive levels for longer than most expected at the start of the year, introduce some added risks.”

The S&P 500 briefly hit 5,200. Peloton Interactive Inc. soared as CNBC reported that a number of private-equity firms are mulling a buyout. Walt Disney Co. sank on a weak subscriber outlook. Apple Inc. saw a small gain after unveiling a new artificial intelligence-focused iPad Pro and a larger iPad Air.

Treasury 10-year yields fell three basis points to 4.45 per cent. A US$58 billion sale of three-year notes garnered solid demand. This week’s offerings also include $42 billion of 10-year notes Wednesday and $25 billion of 30-year bonds Thursday.

Despite resilient consumption and artificial-intelligence optimism, U.S. economic growth slid last quarter while inflation stayed high. Fed Bank of Minneapolis President Neel Kashkari said Tuesday it’s likely the central bank will keep rates where they are “for an extended period of time” until officials are certain prices are on track to their target.

Economists at Morgan Stanley changed their forecast for the timing of the Fed’s first cut to September from July because of “lack of progress” on inflation.

U.S. growth momentum is resilient, but likely slowing, and that could weigh on equities, which have decoupled from the Fed by assuming that an acceleration in growth was lying ahead, a JPMorgan team led by Mislav Matejka wrote. 

The equity rally “created a complacent technical picture,” with sentiment and positioning indicators still near highs, despite some recent consolidation, they said.

“While internals improved, our breadth indicators remain in confirmed sell signals,” said Craig Johnson at Piper Sandler in a note titled “Not Out of the Woods Yet.”

The biggest buyers of U.S. equities, American companies, are back in the market and ready to drive the next leg of the stock rally, according to Goldman Sachs Group Inc. About a sixth of the $934 billion in estimated share repurchases this year are expected get executed in May and June, the firm’s tactical specialist Scott Rubner wrote.

All major Bank of America Corp. client groups offloaded U.S. equities last week, quantitative strategists at the firm said Tuesday. Institutional clients, hedge funds and retail investors sold a net $4.6 billion of U.S. stocks in the five-day period ended Friday, a team led by Jill Carey Hall said in a note.

Meantime, buying options to protect against a stock-market plunge hit the cheapest in nine years this week. 

As the Cboe Volatility Index — or VIX, which measures expected swings in equity markets — sank over the past couple weeks, so did an index tracking the implied volatility of VIX options, known as the VVIX. The VVIX finished Monday’s session just above 73, its lowest closing value since May 2015. The index advanced Tuesday, while holding well below its one-year average of 89.

“Over the near term, U.S. benchmarks can continue to push back toward their recent 2024 highs,” said Dan Wantrobski at Janney Montgomery Scott. “However, we do not believe that the signals for further volatility ahead have been canceled/negated at this time — and thus we continue to watch for another potential downleg in U.S. equities over the coming weeks.”

To Solita Marcelli at UBS Global Wealth Management, investors should stay vigilant on a range of economic and geopolitical risks that could send market volatility back up again.

“Investors can mitigate such volatility and keep their portfolios on track by diversifying and balancing across asset classes,” she noted. “We see significant value in quality bonds in a portfolio context, given their potential for outsized returns if there is a growth misstep, or heightened fears about geopolitical uncertainty.”

Corporate Highlights:

• Palantir Technologies Inc. tumbled as the market appeared unimpressed by the company’s outlook for annual sales after the stock has tripled in the past year.
• Instacart is partnering with Uber Technologies Inc. to offer restaurant delivery through the Instacart app — taking on the top U.S. food delivery app, DoorDash Inc.
• Boeing Co. has been in crisis mode ever since the near-catastrophic accident on a 737 Max 9 in early January — and there’s little sign it’s catching a break anytime soon as the next investigation looms — this time involving the flagship 787 Dreamliner model.
• Spirit AeroSystems Holdings Inc. expects to produce Boeing Co. 737 Max aircraft bodies at a lowered rate for the rest of the year, pressuring its finances as the two companies work to improve quality in their factories.
• Lucid Group Inc. revealed a wider-than-expected loss to start the year as the company contends with production challenges and uneven demand for high-end electric vehicles.
• Microsoft Corp.’s Xbox gaming division will shut down four subsidiaries, including the game studio Arkane Austin, according to an email reviewed by Bloomberg.
• Truist Financial Corp. boosted its revenue forecast for the year after it completed the sale of a majority stake in its insurance-brokerage business.
• UBS Group AG returned to profit after two loss-making quarters, cementing sustained progress in the integration of Credit Suisse after its emergency rescue last year.

Key events this week:

• Toyota earnings, Wednesday
• Germany industrial production, Wednesday
• Fed Governor Lisa Cook speaks, Wednesday
• Bank of Japan issues summary of opinions from April policy meeting, Thursday
• China trade, Thursday
• UK BOE rate decision, Thursday
• U.S. initial jobless claims, Thursday
• UK 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 rose 0.1 per cent as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average was little changed
• The MSCI World index rose 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.2 per cent
• The euro fell 0.1 per cent to $1.0756
• The British pound fell 0.4 per cent to $1.2509
• The Japanese yen fell 0.5 per cent to 154.65 per dollar

Cryptocurrencies

• Bitcoin fell 0.4 per cent to $63,018.51
• Ether fell 0.9 per cent to $3,049.32

Bonds

• The yield on 10-year Treasuries declined three basis points to 4.45 per cent
• Germany’s 10-year yield declined five basis points to 2.42 per cent
• Britain’s 10-year yield declined 10 basis points to 4.12 per cent

Commodities

• West Texas Intermediate crude was little changed
• Spot gold fell 0.4 per cent to $2,315.07 an ounce