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Dow at 40,000: Why stocks still have 'plenty of room to run'

Investors are catching the bull by the horns.

That’s the sentiment gripping Wall Street, as stocks notch record highs and the market is on track for its best month of the year.

A late surge in the final stretch of trading pushed the Dow Jones Industrial Average (^DJIA) to close above 40,000 for the first time ever Friday — a milestone that comes just 874 trading days after the Dow first closed above 30,000.

The blue-chip index added 1.2% for the week, while the S&P 500 (^GSPC) and Nasdaq (^IXIC) both recorded their longest weekly winning streaks since February.

“Psychologically it's amusing,” JPMorgan Asset Management’s Jack Manley said of the milestone on Yahoo Finance’s ‘Morning Brief.’

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“The rally feels good because the macro data has been pretty good,” he said.

Goldman Sachs (GS), Microsoft (MSFT), and UnitedHealth (UNH) were the top three point contributors to the Dow’s charge from 30,000 to 40,000.

And the makeup of the Dow looks different than it did during previous milestones. The index most recently replaced Walgreens (WBA) with Amazon (AMZN), bringing it to its current composition.

This week’s softer inflation print helped bolster the case for the Federal Reserve to cut interest rates before year end, as more investors place their bets on a soft landing.

In a note to clients this week, Truist co-chief investment strategist Keith Lerner wrote the recent rally is a “healthy sign and typical characteristic of a bull market,” suggesting “upside potential remains.”

And Lerner is not alone. Top Wall Street strategists tell Yahoo Finance that the run is far from over, although the ride ahead may be bumpy for investors.

“The screens are green and the skies are blue … there's more upside,” BMO Capital Markets chief investment strategist Brian Belski told Yahoo Finance. “But that doesn't mean that stocks are going to be linear forever. We are going to see some sort of a normal correction and that's a better buying opportunity.”

Belski warns that a more significant pullback than the 5.5% drawdown earlier this year is likely — before bouncing back to a higher base. He raised his 2024 year-end forecast to a Street high of 5,600; the S&P 500 closed just above 5,300 this week.

“The fourth quarter in particular, especially post-election, will do very well,” Belski added.

A growing list of strategists have raised their S&P year-end targets. As it stands today, more than half of the strategists tracked by Yahoo Finance have year-end targets at or above 5,300.

Manley sees the market gaining another 5% to 10% from current levels, as long as “the economy is doing well” and earnings “catch up.”

“Big tech names have really been pulling their weight but we need the rest of the index to start playing ball too,” Manley said. “That’s a back-half story, and I think it helps to lift the market just a bit higher.”

Strong earnings are a key part of the Street’s bullish narrative.

As of Friday afternoon, the S&P 500 is on track for earnings growth of 5.7%, the highest earnings growth rate since Q2 2022, according to FactSet. Looking ahead, analysts expect year-over-year earnings growth rates of 9.2% for the current quarter, and 11.1% for fiscal 2024.

Newton Investment Management chief investment officer John Porter told Yahoo Finance he expects the breadth of the earnings improvement to continue beyond big tech, leading to a broadening rally.

Of the 30 best performing stocks on earnings this season, only five came from the tech sector, according to data compiled by Bespoke Investment.

“The resiliency of the market in the face of much more modest rate cut expectations is very impressive,” Porter said of the 2024 rally. “As long as the market continues to feel the next move from the Fed is a rate cut, I think you've got good support for the broad market.”

While it’s up for debate how much higher stocks can go from here, Carson Group’s Ryan Detrick wrote in a post on X that based on historical analysis, stocks were up 20% on average each time in the year after the Dow hit 10,000, 20,000 and 30,000.

In search of value stocks amidst the Dow's record run? Value stock veteran Jonathan Boyar reveals some of his top picks to Yahoo Finance Executive Editor Brian Sozzi in a new episode of the Opening Bid podcast. Listen in below.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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