Is this as good as it gets?
It seems like everything is working, and with good reason: The broad rally is supported by an accelerated vaccine rollout and recent economic reports that have been robust across the board. Nonfarm payrolls. ISM Manufacturing. ISM Services. Consumer Confidence. All much better than expected.
Even the often-dour folks at the International Monetary Fund are sounding more optimistic. They raised their global gross domestic product forecast to 6%, from 5.5% in January.
Not surprisingly, investors are euphoric but increasingly cautious.
"I think the market is priced for perfection," Riverfront Investment's Kevin Nicholson said on CNBC. "It's priced such that it wants to make sure that the rollout rolls out smoothly, we continue to get vaccines done, we reopen the economy and that we have a good, strong earnings season. And all of those things so far seem to be on track."
Not only are major averages at new highs, but other market internals, like the number of stocks advancing versus those declining, are also flashing bullish signals.
Companies have responded to the euphoria in a predictable way: with more stock.
Equity issuance is at a record high. Goldman Sachs' David Kostin estimates corporate America raised $116 billion in new capital in the first quarter, spread out between 226 SPACs and 65 IPOs. And that's not including secondary issues.
Little wonder investors are on a buying spree.
The large-cap S&P 500 is at a new high, and the small-cap Russell 2000 is only 3% from its record.
Many megacap tech stocks, which were clobbered in mid-February on concerns about higher rates, are also back at or near new highs, including Microsoft, Alphabet, Facebook, Texas Instruments and Lam Research.
Most travel and leisure stocks, which have been on a roller-coaster ride for two months depending on whether the vaccine and virus news have seemed optimistic or pessimistic, are once again within 5% of their old highs, including Avis, Delta, Carnival Cruise Lines, Marriott and Visa.
How much more growth can we reasonably expect?
And yet there are already signs that growth is about as strong as it can be expected to be.
Deutsche Bank's chief strategist Binky Chadha has noted a strong correlation between the S&P 500 and certain key economic indicators, particularly the ISM Manufacturing Index, a proxy for U.S. growth, which recently hit a four-decade high.
Chadha noted that the ISM tends to peak around 10 to 11 months after a recession, very close to where we are now. He expects the ISM — and markets — to peak fairly soon: "As growth peaks over the next three months, we expect discretionary investors to pare their positioning from extremely elevated levels, and see retail investors as unlikely to buy the dip."
He expects a pullback of 6% to 10% in stocks as growth peaks over the next three months.
Still, Covid is such a unique situation that most on Wall Street are still not quite sure if the usual rules will apply to this Black Swan event.
"This is not a normal business cycle, and I don't know if the rules of thumbs that applied in the past will necessarily hold," said Jack Miller, head of trading at Baird.
The next catalyst: guidance
What will make or break the markets in the coming months? While the course of the vaccine rollout and the efficacy of the virus against variants are the main macro issue, most strategists are very clear on the main short-term catalyst: earnings guidance.
Barclays analyst Julian Mitchell reflects the opinion of most strategists: "We expect most companies that have given 2021 guidance to raise it," he said in a recent note.
It's not just raised guidance that analysts and strategists are expecting. They want more guidance.
"Last year, Covid was used an excuse to stop providing guidance," Miller told me. "You can't use that excuse anymore. We should have more visibility now."
The implication: CEOs who continue to decline to provide any guidance will likely face pushback from investors.