What a ride investors have been on this week. After record-high closes for most exchanges this year (and the Nasdaq joining the fray yesterday), the markets are all ticking higher once again today. All three major indices are seeing strong gains, trading near all-time highs at the time of writing. Such a move has many investors asking the simple question: Why are stocks up today?
As is the case with answering this question on any given day, there are plenty of factors to consider. Yesterday’s PCE numbers came in at their lowest levels since March 2021, big news for investors banking on rate cuts. Accordingly, bond yields are declining, with the key 10-Year U.S. Treasury now trading below 4.2%. That’s generally good news for stocks, as this yield is the key metric used to discount future cash flows to the present.
Additionally, a wave of enthusiasm related to artificial intelligence (AI) continues to hit the market. Shares of Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) both surged higher today, trading near all-time highs. These semiconductor manufacturers appear to be benefiting from the news that Dell Technologies (NYSE:DELL) will be putting forward stronger orders for hardware equipped with chips from both companies.
Let’s dive more into today’s price action and see what to make of this move.
Why Are Stocks Up Today?
It appears the stars are aligning on multiple fronts for investors in risk assets. The increased likelihood of interest rate cuts from central bankers should spur higher valuations in the coming quarters or at least allow for valuations to remain near historically high levels for the time being.
That’s great news for stocks that have seen their valuations balloon in recent quarters. Of course, AI stocks, or those with business models that directly benefit from this sector’s growth (such as chipmakers), have seen expectations grow considerably. If valuation multiples are forced to come down via macro or sector-specific concerns, that’s not great for the market, given how large many of these players have become.
Indeed, companies like Nvidia and AMD matter a great deal to overall market returns. The so-called “Magnificent 7,” a group of mega-cap tech stocks that make up roughly a quarter of the market capitalization of most indices, has driven more than half the market’s performance this year. If that’s to continue, this sort of bullish environment will have to continue.
For now, investors appear to be taking the view that this rally has legs. By all accounts, it’s hard to bet against this view (and has been expensive to do so). Thus, until something changes, it appears the market’s inertia is only headed in one direction — higher. At least for now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
