NEW YORK (Reuters Breakingviews) - U.S. stocks are reaching fresh highs, with the S&P 500 Index closing at a new record on Thursday. Yet investors continue to pull out of equities, and fund managers report extreme bearishness. Companies buying their own shares are the market’s best friend.

The proximate cause of the gains was the dovish outlook delivered the previous day by Federal Reserve Chairman Jerome Powell. Futures markets have now priced in the certainty of a rate cut by the central bank at its next meeting in July. In sympathy, the yield on the U.S. Treasury’s 10-year note dipped below 2% on Thursday for the first time since Donald Trump’s presidential-election victory in 2016.

Lower interest rates should, in theory, encourage investors to buy stocks, as well as other assets. Yet the fundamentals pushing rates lower this time are also driving investors out of the equity market. Escalating trade tensions with China are sapping corporate confidence while weak growth and persistently low inflation prompted European Central Bank President Mario Draghi this week to hint at fresh easing.

Those factor are weighing on the American economy and on companies. Analysts now expect S&P 500 earnings to decline by 2.5% year-on-year in the second quarter, according to FactSet, which would mark the first time since 2016 that earnings have slipped in two consecutive periods.

That helps explain why investors have pulled $41 billion out of U.S. equity mutual and exchange-traded funds this year as of June 12, according to Lipper data from Refinitiv. Fund managers surveyed by Bank of America Merrill Lynch expressed more bearishness in June than at any time since the end of the financial crisis, slashing their allocation of equities relative to bonds to the lowest level since 2009.

The Fed is a fragile support when it’s the only game in town. But companies are helping out. In 2018, S&P 500 companies repurchased a record $806 billion of their own shares. With investment prospects uncertain, they’ve accelerated buybacks of stock by 17% this year, according to BofA. They’re prolonging a Wall Street rally nobody else loves.

CONTEXT NEWS

- The S&P 500 Index hit a closing record on June 20. Meanwhile, U.S. Treasury securities rose in value, pushing the yield on the benchmark 10-year note below 2% for the first time since Donald Trump’s presidential-election victory in November 2016.

(Editing by Richard Beales and Amanda Gomez)

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