(Bloomberg) -- There are many reasons to doubt the rebound in US stocks, but it has at least one powerful factor on its side: momentum.
History shows that the rally may extend further than investors might expect and bode well for stock performance down the road. Though it’s not infallible, that trend is good news for traders betting that stocks might have more room to run following a dismal start to the year.
The bounce in the S&P 500 Index has already been one for the record books. The benchmark index notched its ninth-straight daily gain on Friday, the longest stretch since 2004. Such streaks have tended to precede further upside: The S&P 500 was a median 20% higher a year after moves of similar magnitude while notching gains in shorter-term periods along the way, according to WisdomTree’s Jeff Weniger, who analyzed data going back to the late 1980s.
“Your gut says ‘Maybe this is too much, maybe take some chips off the table,’” said Weniger, the firm’s head of equities. “But in actuality, this often times tends to beget more in the way of the rally.”
Analysts have pointed to a variety of factors driving the gains. Markets have cheered signs that the US is seeking to eventually ease tariffs on China and reach trade deals with other countries. Stronger-than-expected jobs data on Friday also buoyed optimism, along with solid earnings from a quartet of Big Tech companies last week.
Market observers also say that fund managers are fearful of missing out on more upside and some are now raising their exposure to equities, further stoking the upward momentum. The S&P 500 is just 8% away from its Feb. 19 record high, rebounding from a loss of nearly 20% last month.
Technical analysts have also noted that the benchmark is back above its 50-day moving average, a closely-watched indicator of short-term support, for the first time since the week it hit its last record.
Another important factor is the reawakening of the so-called Magnificent Seven technology giants, whose shares are key drivers of the S&P 500 due to their heavy weightings in the index. Earnings for Meta Platforms Inc. and Microsoft Corp. were stronger than expected last week, allowing investors to shrug off less favorable results from Apple Inc. and Amazon.com Inc. A Bloomberg index of Magnificent Seven stocks has surged 19% since the April 8th bottom.
The cohort “may be the only growth story in town and now they’re trading at valuations I would say are cheap,” said David Wagner, portfolio manager at Aptus Capital Advisors LLC.
Plenty of investors are hesitant to jump aboard the rally, especially with little clarity on how the trade war could shake out and its eventual toll on the economy. Actual progress on negotiations with China remains remains scant. Trade frictions with other countries could also flare once the pause on levies expires in July.
“It is a big stretch to think that initial high level talks between the US and China means that outlook for the US economy should return to its pre-Liberation Day levels,” Matt Maley, chief market strategist at Miller Tabak + Co. “The tariff issue is still going to create some real headwinds for the economy.”
Nevertheless, recent stock moves echo past periods of sustained gains, rather than short-lived bear market rallies.
The S&P 500 has posted an average daily move of 1.8% since April 8. Much bigger swings, which occurred during periods of market stress such as the Covid-19 shock and the 2009 financial crisis, have been absent.
That’s a positive sign, as daily moves of over 3% tend to coalesce around periods of market distress, according to a report from Nathaniel Welnhofer, an analyst at Bloomberg Intelligence.
“Slow-and-steady gains in S&P 500 stocks should be celebrated,” he said.
