Bull Market..Maybe?

Stock-market bulls are in the driver’s seat ahead of a busy stretch that features key economic data and the Federal Reserve’s next interest-rate decision.

The S&P 500 entered a new bull market last week after rising more than 20% from its October low. The bear market, which lasted 248 trading days, was the index’s longest since 1948, according to Dow Jones Market Data. It is up 13% in 2023.

Below the surface, there are encouraging signs the rally has legs, even though few investors had much confidence in it until recently. Investor sentiment rose last week to the highest level in a year and a half. Market breadth, or the number of stocks participating in the rally, has finally widened beyond shares of big technology companies.

Meanwhile, individual investors have jumped back into the market after largely sitting on the sidelines for the past three months, and institutional investors are piling back in as well, based on recent fund-flows data.

“It’s certainly been a pleasant surprise,” said Kristina Hooper, chief global market strategist at Invesco. “What we’re seeing is a fear of missing out. There’s been a significant portion of investors that have sat out since last fall, and they’ve seen the stock market go up and up.”

Tuesday’s consumer-price index data, which will provide insight into the direction of inflation, will mark the next test for stocks. Inflation remains well above the Fed’s 2% annual target, and markets have been particularly volatile in recent months around the release of the report.

Then, the Fed on Wednesday is widely expected to hold interest rates steady but could signal further rate increases ahead. Fed Chair Jerome Powell’s press conference will be closely parsed by investors for any insight into his thinking about the resiliency of the labor market and the economy. U.S. retail sales data, which has generally been robust, will follow Thursday.

Hopes that the central bank is nearing the end of its interest-rate-raising campaign have fueled the 2023 rally. The blue-chip Dow Jones Industrial Average has gained 2.8%, while a boom in artificial intelligence has helped to power tech stocks higher, with the Nasdaq Composite up almost 30%.

Worries about a potential recession have also eased of late. Employers are still hiring aggressively, consumers are spending freely and the housing market appears to be stabilizing, as does the banking sector.

“People are starting to become more positive on equity markets as the place to go,” said Brett Bernstein, chief executive at XML Financial Group. Bernstein said he is looking to add to equities exposure over bonds, also noting the income earned on money-market funds will go down if the Fed cuts rates.

Wall Street appears to think stocks have more room to run. Goldman Sachs Group on Friday boosted its year-end price target on the S&P 500 to 4500 from 4000, which would represent a gain of 3.7% from Monday’s close. The bank based its assessment on receding odds for a recession and an improving corporate earnings picture.

Meanwhile, history suggests that stocks keep rising after kicking off a new bull market. In such cases going back to the 1950s, the S&P 500 rose 92% of the time over the next 12 months, with an average return of 19%, according to Bank of America Global Research.

Investor sentiment has shifted in turn. Bullish sentiment, or expectations that stock prices will gain over the next six months, jumped last week to 44.5%, the highest level since November 2021, when tech and other growth stocks peaked, according to the American Association of Individual Investors. That snapped a 16-week stretch in which the reading was below the long-term average of 37.5%.

Some signs of market breadth have also improved in recent days. Through Wednesday, 20 stocks were responsible for the S&P 500’s positive return this year, up from eight at the end of May, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Joining Apple, Microsoft and Nvidia on that list were Eli Lilly, General Electric and Berkshire Hathaway.

Even shares of small-cap stocks, which are often perceived to be risky and economically sensitive, are gaining. The Russell 2000 has gained 7.1% in June, its best start to a calendar month since February 2021, according to Dow Jones Market Data. Small caps started the year strong, but the rally didn’t last long.