Traders on the floor of the New York Stock Exchange.

Source: NYSE

Is that as good as it gets?

It seems like everything is working, and for good reason: The broad rally is supported by accelerated vaccine rollout and breaking economic reports that have been consistently robust. Payrolls outside of agriculture. ISM manufacturing. ISM services. Consumer confidence. All much better than expected.

Even the often grumpy people at the International Monetary Fund sound more optimistic. They raised their forecast for global gross domestic product from 5.5% in January to 6%.

Unsurprisingly, investors are euphoric but increasingly cautious.

“I think the market is perfectly priced,” said Kevin Nicholson of Riverfront Investment on CNBC. “The price is so high that we want to make sure the rollout goes smoothly, we keep getting vaccinations, reopening the economy, and having a good, strong earnings season. And all of these things seem to be in full swing so far.” Track.”

Not only are important averages hitting new highs, other market internals, such as the number of stocks rising compared to declining stocks, are flashing bullish signals.

Companies responded to the euphoria in a predictable way: with more inventory.

The share issue is at a record high. Goldman Sachs’ David Kostin estimates the American company raised $ 116 billion in new capital in the first quarter, spread across 226 SPACs and 65 IPOs. And that doesn’t include secondary problems.

Everything is going on!

No wonder investors are on a shopping spree.

The large-cap S&P 500 is at a new high, and the small-cap Russell 2000 is just 3% off its new high.

The growth (IVW) is at a new high, as is the value (IVE).

Low volatility stocks (typically utilities and consumer staples) are at a new high (SPLV), but high volatility stocks are only 1% away from a new high (SPHB).

Many of the larger work-from-home holdings that were mocked as relics for 2020 a few months ago are also at new highs, including Home Depot, Lowe’s, Target, Sherwin-Williams, and Masco.

Many mega-cap tech stocks that were overstretched in mid-February on concerns about higher interest rates are also back to or near new highs, including Microsoft, Alphabet, Facebook, Texas Instruments, and Lam Research.

Most travel and leisure stocks that have been on a roller coaster ride for the past two months, depending on whether the vaccine and virus news seemed bullish or pessimistic, are back within 5% of their old highs, including Avis, Delta, Carnival Cruise Lines, Marriott and Visa.

How much more growth can we reasonably expect?

Yet there are already signs that the growth is about as strong as would be expected.

Deutsche Bank’s chief strategist Binky Chadha has found a strong correlation between the S&P 500 and certain key economic indicators, most notably the ISM Manufacturing Index, an indicator of US growth that recently hit a four-decade high.

Chadha noted that the ISM typically peaks around 10 to 11 months after a recession, very close to where we are now. He expects the ISM – and the markets – to peak soon: “As growth peaks in the next three months, we expect discretionary investors to reduce their positioning from an extremely high level and private investors as consider unlikely to buy the decline. “

He expects stocks to decline 6% to 10% as growth peaks over the next three months.

Even so, Covid is such a unique situation that most on Wall Street are still not entirely sure whether the usual rules apply to this Black Swan event.

“This is not a normal business cycle and I don’t know if the rules of thumb in the past apply,” said Jack Miller, commercial director at Baird.

The next catalyst: instructions

What will the markets do or break in the coming months? While the course of vaccine adoption and the effectiveness of the virus against variants are the main macro problem, most strategists are very clear about the main short-term catalyst: the profit forecast.

Barclays analyst Julian Mitchell echoes the opinion of most strategists: “We expect most companies that have issued guidelines in 2021 to increase them,” he said in a recent note.

It’s not just elevated guidance that analysts and strategists expect. They want more guidance.

“Last year, Covid was used as an excuse not to provide guidance,” Miller said. “You can’t use that excuse anymore. We should have more visibility now.”

The implication: CEOs who continue to refuse to provide guidance are likely to be pushed back by investors.