Wall Street Street | Great Day For Volume Stocks on Fresh Index Records

U.S. stocks advanced on Monday, building off a record finish ahead of the ramping up of fourth-quarter earnings season.

While the S&P 500 finally returned to record territory on Friday, skeptical investors question the rally's staying power given stretched valuations.

"With forward multiples already at historic peaks and earnings forecasts for 12 months forward ambitious, equity market gains may stall in 2024, as better earnings are met with lower valuation multiples characteristic of a midcycle or soft-landing environment," Lisa Shallett, chief investment officer at Morgan Stanley Wealth Management, said in a note.

While 2023 S&P 500 Index earnings are currently forecast to land at $219-$221, the 2024 consensus is running at $242-$244. Morgan Stanley estimates are slightly below that, she said.

"To push the index through 5,000, investors will need to confidently price upside to $250 by midyear. This is a potential stretch, given the level of uncertainty we expect," she wrote.

Matthew Tuttle, the chief executive and chief investment officer at Tuttle Capital Management, said the Magnificent Seven tech giants have now technically moved into overbought conditions.

The Federal Reserve is expected to start easing its monetary policy in March amid a continued decline in inflation, while policymakers seem set to keep their benchmark lending rate unchanged later this month, UBS Securities said.

To cool inflation, the central bank's Federal Open Market Committee has raised interest rates by 525 basis points since March 2022, with its last hike in July 2023. Last month, the FOMC held rates steady -- its third consecutive pause -- and lowered its median rate and inflation expectations through 2025.

"We continue to expect the FOMC to deliver its first cut of the cycle in March," UBS economists, including Pierre Lafourcade and Jonathan Pingle, said in a note e-mailed Monday. "The no-cut scenario appears to be a done deal for the January meeting." The FOMC will meet on Jan. 30-31.

On Friday, official data are likely to show that core personal consumption expenditure prices rose 0.15% last month, leaving annual core PCE inflation at 2.91%, down from November's 3.15% print and dropping below 3% for the first time since March 2021, according to the note. The firm projects 12-month core PCE inflation to ease to 2.4% in March.

"Our forecast of rapid core PCE disinflation in the next few months means a further no-cut decision in March would push up the real rate far above the [FOMC's Summary of Economic Projections'] assumption of 2.2% to 3%," the UBS economists said. "This real rate surge is an intensifying level of policy restrictiveness to a degree at odds with most committee members' stated preferences."

Oil prices settled Monday at their highest level in about a month, finding support from ongoing risks to global supplies as a rally in U.S. equities lifted prospects for the economy and energy demand.

Oil traders are "starting to realize with the stock market breaking record highs that it's unlikely that we're going to see an economic recession," Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch. That is "adding to demand expectations at a time when the supply situation looks to be tightening."

"Demand is going to exceed expectations if the economy continues to grow and that's going to leave a bigger supply deficit once we get deep into the new year," he said.

Tensions in the Red Sea and tensions between China and Taiwan show that the risk to oil supply is "high at the same time North Dakota oil production it took a hard hit from the cold, reducing output for at least the rest of the month," Flynn said.