The Dow Jones Industrial Average ignores significant risks to hit an all-time high. Here are the concerns for the next week.

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The 10-year Treasury yield jumped to 1.704% last week, the highest since April, a level that caused dismay earlier this year. This time around, investors remained optimistic.

Michael Nagle / Bloomberg

If the only thing we need to fear is fear itself, then the stock market has nothing to fear, at least not yet.

The lack of market concern was palpable last week. It wasn’t just the performance of the major indices, although that is certainly part of it:


Dow Jones Industrial Average

rose 382 points, or 1.1%, to close at a record high, while the


S&P 500

gained 1.6% and the


Nasdaq Composite

advanced 1.3%.

These gains were not the logical answer to action elsewhere. The 10-year Treasury yield jumped to 1.704%, the highest since April, a level that caused dismay earlier this year. Nothing. The amount of inflation reflected in inflation-protected 10-year Treasury securities reached 2.66%, its highest level in 15 years. Crickets. Fed funds futures now have a more than 70% chance of a rate hike by June 2022, much sooner than promised. Not a thing.

Perhaps it is the combination of all of these things that explains the optimistic reaction of investors. “The market is betting more and more that the Fed will take action by raising rates to calm these inflationary pressures,” writes Joseph Kalish, chief global macroeconomic strategist at Ned Davis Research.

Many of these pressures may have already been incorporated. Consider the reactions to financial results this earnings season. Yes, some companies have been forced to lower their forecasts due to rising costs, but for the most part the results have been strong. As of Wednesday, 99 companies had released their results and only 10 had missed analysts’ earnings expectations, according to data from Bespoke Investment Group, while 75% were beating sales forecasts.

These numbers are roughly in line with previous quarters, but there is one big difference: how stocks have performed. Stocks gained an average 1.6% on trading day after a beat, an about-face from the last quarter, when the beats were often rewarded with a loss.

“This suggests that investors may have entered this earnings season with much lower expectations than in previous quarters after the pandemic,” Bespoke strategists write. “If so and earnings continue to be strong, the market will be bullish over the next month or so.”

This coming week, the earnings of


Apple

(ticker: AAPL),


Microsoft

(MSFT) and the rest of Big Tech. Things could get bloody. Last week,


Break

stock (SNAP) fell 29% after Snapchat’s parent posted advice that showed how much ad revenue was affected by changes in Apple’s user tracking. This sent social media actions across the board on Friday, with


Facebook

(FB), which reported on Monday, down 5.1%,


Twitter

(TWTR) down 4.8%, and


Alphabet

(GOOGL) at 3%, as investors bet they would face big problems as well.

For now, the market is calm. The


Cboe volatility index,

or VIX, which fell to a new 18-month low of 15.01 last Thursday, barely rose to 15.46 on Friday after hitting 28.79 in September. That could mean next week will be tough – the S&P 500 typically stalls the week after the VIX hits a new 18-month low, according to Sundial Capital Research – but has continued to post a median gain of 4% over the past six next months.

“I suspect the market is taking a break after the new low in volatility,” writes Dean Christians of Sundial. “However, I would not let the low volatility regime change your outlook for the bull market.”

We will have to wait for something more frightening.

Write to Ben Levisohn at [email protected]


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