The major stock market indices surged to record highs last week, having eclipsed the previous high in January 2022 on the back of a new bull market that has delivered a 45% return since October 2022.

However, bull markets do not tend to reach exhaustion upon hitting new highs. In fact, history shows that the initial breach of an all-time high tends to be more of a mile marker on the way to further gains.

Most of the action over this holiday-shortened week occurred on Thursday as participants reacted to another blowout quarter from NVIDIA (NVDA). NVIDIA’s report renewed the market’s enthusiasm for AI-related stocks, other growth stocks, and semiconductor shares.

Fear of missing out on further gains was a powerful directional driver this past week that added to the post-NVDA earnings rally. Even on Friday, when growth stocks and semiconductor shares underperformed, the broader market finished with a positive bias.

Notably, the information technology sector (+2.0%) was the second biggest gainer this week despite the jump in NVDA shares, trailing only the consumer staples sector (+2.1%). All 11 S&P 500 sectors registered gains this week, but the energy (+0.4%) and real estate (+0.9%) sectors still lagged index performance by a decent margin.

Reaching new record highs has not typically marked an exhaustion point for markets, though it’s reasonable to expect a breather in the near term given the speed and size of the recent rally. Nevertheless, it’s still possible that the markets can build on gains over the course of this election year, with the next leg possibly getting help from a broadening of leadership in asset classes and sectors that have lagged more recently.

At the same time, this rally is not infallible. Leadership has been rather concentrated, valuations are full (though not unsustainable), and it’s far from guaranteed that the Fed will perfectly thread the needle that seamlessly sews together a growing economy alongside persistently falling inflation.

The run still may have more gas left in the tank. But even the best markets run out of breath periodically.

The good news is that such episodes, while not painless, may prove temporary. 

With the indices at their current lofty levels, we’ll certainly need to be very vigilant and closely attentive to the market actions going forward. This is no time to be cavalier or cocky. My over 5 decades of trading experience tell me it’s exactly at these times when investors and traders tend to get overconfident and, as a result, may not take the correct protective actions they’ll need to prevent losses in their portfolios!

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