The stock rally driven by the exuberance surrounding artificial intelligence is widening beyond the tech industry, defying naysayers and raising concern about an overbought market.

Mounting bets that the Federal Reserve will end its tightening cycle sooner rather than later to prevent a recession added fuel to the equity advance, with the S&P 500 topping 4,400 and rising for a sixth straight day. The Dow Jones Industrial Average extended its advance from a September low to almost 20 per cent, while the Nasdaq 100 closed at its highest since March 2022.

Microsoft Corp., which has unveiled a procession of AI-based products in recent months, climbed to a record. Lennar Corp. led a rally in homebuilders on a bullish outlook. Restaurant chain Cava Group Inc. soared in its trading debut. Delta Air Lines Inc. climbed for a 15th straight session as its board voted to restart the quarterly dividend. A gauge of U.S.-listed Chinese stocks jumped with Beijing seen rolling out more stimulus to help the economy.

Wall Street’s fervor will face a big test on Friday as a massive amount of options contracts tied to stocks and indexes are set to mature. The event, known as OpEx, typically obliges traders to either roll over existing positions or start new ones. That usually involves portfolio adjustments that lead to a spike in volume and sudden price swings. 

Equities continued to gain traction after the U.S. benchmark crossed the bull-market threshold last week, surging more than 20 per cent from its October low. Traders kept piling into stocks even after the S&P 500’s 14-day relative strength index topped 70 — which is seen by some traders as one indication of an overbought market.

“U.S. stocks have defied skeptics and rallied this year in the face of bank collapses, constant fears of a recession, and what’s expected to be a slowdown in corporate profits,” said Arthur Hogan, chief market strategist at B. Riley Wealth. “For our part, we assume that inflation will look better in the second half.”

MARKET BREADTH

Market breadth has improved notably, with multiple sectors exhibiting stronger relative strength trends, according to Dan Wantrobski at Janney Montgomery Scott. 

“All this being said, our concern grows that leadership areas like the Nasdaq 100 index and S&P 500 remain very overbought/extended on a short-term basis,” wrote Wantrobski. “While we understand that overbought conditions such as these can last for some time, we also understand that historical data illustrates they cannot be sustained indefinitely.”

Wantrobski says there’s still a “high probability” of a pullback ahead as we move beyond June.

In fact, the rally in equities faces a fresh threat over the next few weeks with the world’s biggest money managers set to unload as much as US$150 billion of stocks. JPMorgan Chase & Co. projects real-money portfolios will tilt back in favor of bonds to meet allocation targets, in the largest rebalancing flows to the asset class since the fourth quarter of 2021. 

The periodic rejigging could knock off as much as 5 per cent from the price of global stocks, according to estimates by JPMorgan strategist Nikolaos Panigirtzoglou.

Bonds climbed Thursday, with the yield on 10-year Treasuries declining seven basis points to 3.71 per cent. The dollar slumped the most since February.

The euro rallied as the European Central Bank lifted interest rates by another quarter-point, with President Christine Lagarde describing a further hike in July as “very likely.”

The move came a day after Fed officials paused their series of interest-rate hikes, but projected borrowing costs will go higher than previously expected, owing to what Chair Jerome Powell called surprisingly persistent inflation and labor-market strength.

‘AWKWARD’

The Fed is now in a “data-dependent” mode before it delivers what may be just one final increase in U.S. borrowing costs next month, former Vice President Richard Clarida said.

“It was what I would call an awkward but hawkish pause,” Clarida, who is now a global economic advisor at Pacific Investment Management Co. told Bloomberg Television on Thursday.

The U.S. economy is holding up, but losing steam. 

While an advance in retail sales last month exceeded nearly every estimate, the report also showed consumer demand has moderated from the past year. Separate data showed factory production remained sluggish and applications for unemployment benefits held at the highest level since late 2021.

Elsewhere, oil rebounded as strengthening demand in China outweighed concerns over further interest rate hikes in the U.S. West Texas Intermediate futures traded near US$70 a barrel on Thursday after falling 1.7 per cent in the previous session. 

Key events this week:

• Bank of Japan rate decision, Friday
• U.S. University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 1.2 per cent
• The Dow Jones Industrial Average rose 1.3 per cent
• The MSCI World index rose 1 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.7 per cent
• The euro rose 1.1 per cent to US$1.0947
• The British pound rose 0.9 per cent to US$1.2783
• The Japanese yen fell 0.1 per cent to 140.26 per dollar

Cryptocurrencies

• Bitcoin rose 2.1 per cent to US$25,442.19
• Ether rose 1.8 per cent to US$1,668.22

Bonds

• The yield on 10-year Treasuries declined seven basis points to 3.71 per cent
• Germany’s 10-year yield advanced five basis points to 2.50 per cent
• Britain’s 10-year yield was little changed at 4.38 per cent

Commodities

• West Texas Intermediate crude rose 3.3 per cent to US$70.52 a barrel
• Gold futures rose 0.1 per cent to US$1,971.30 an ounce