What’s Powering the Stock Market’s Record Highs? Strong Earnings—and FOMO

The stock market is on a roll.

The S&P 500 reached a record high at the close on Tuesday for the first time since September, while the Nasdaq Composite also notched a closing high for the first time since August.

The rally is being powered by a better-than-expected earnings for the first quarter. The solid results have been across the board in U.S. companies including Caterpillar Inc., Coca-Cola Co., United Technologies Corp., Lockheed Martin Corp., Twitter Inc. and Snap Inc.

“There are more positive than negative surprises and that has given investors a little more confidence,” Bob Doll, chief equity strategist at Nuveen, said in an interview. Investors feel there’s much to feel confident about. Recession fears are fading, inflation is subdued, the Federal Reserve is pausing on raising interest rates and the economy is showing resilience. China-U.S. trade talks are progressing and Brexit has been kicked down the road.

“A lot of the risks on everybody’s mind going into the year have gone away or subsided,” said Chris Gaffney, president of world markets at TIAA Bank. The Fed’s signal on rates is a big help. “The Fed is not going to get in the way of businesses by increasing rates,” he said. “The Fed on the sidelines is great for companies.”

Investors feared the bull market was on its death bed in December, when the prospect of slower growth and weaker company fundamentals led to a market meltdown. “In some ways there was an overreaction to the fourth quarter, and now it might be a slight overreaction to the lack of significant bad news in the first quarter,” said Margaret Chen, head of CA Capital Management, Cambridge Associates’ outsourced investment office business, which has $ 32.4 billion in assets.

Nevertheless, “investors are learning to manage market anxiety much better,” she said. “They are getting conditioned to go to the brink of uncertainty but not go over the cliff.”

Indeed, companies may be benefitting from lowering their earnings estimates early. From there “it was easier for companies to beat those lower expectations,” TIAA Bank’s Gaffney said. According to FactSet data, 78% of the S&P 500 companies have reported above analyst estimates in the first quarter. But going forward? Companies “are not going gangbusters on the forward guidance,”’ Gaffney points out.

Money that has been on the sidelines is moving back into the market especially in index funds. Money-fund assets stood at $ 3.04 trillion as of April 17, up from $ 2.88 trillion at the end of September, according to the Investment Company Institute. “There’s the fear of missing out, so they are buying,” Nuveen’s Doll said.

There’s also reason to be a bit cautious even if the rally proves to have legs. In addition to slightly lower corporate profit expectations going forward, there’s some softness in global economic data. While the market rally is in “a new phase,” TIAA’s Gaffney said, “We’ll bounce around but it won’t be a dramatic push higher. It’s more of a drift higher.” That was true in early trading Wednesday as the U.S. market fluctuated.

Nuveen’s Doll said he’s “boringly neutral at the moment” and he doesn’t see anything that can move the markets “significantly higher from here.”

So investors should enjoy the view from the top – for now.