The S&P 500 stock index climbed back over a record it set more than a year ago, capping a stop-start recovery that has been one of the most uneven and uncertain in recent memory.
The rally, which on Monday took the index above the high set in May 2015, was derailed at various points by plunging oil prices, currency devaluations in China and most recently the U.K. vote to leave the European Union. In a telling sign, mutual-fund investors have pulled a net $ 66.9 billion from U.S. equity funds on balance this year, according to Lipper data.
Yet the broad index of U.S. stocks has rebounded 17% from its trough in February, boosted most recently by a better-than-expected jobs report Friday. Stocks are also getting a lift from falling bond yields that leave investors limited alternatives for their money.
"People have been cautious and skeptical all year long, pulling money from mutual funds," said Bruce Bittles, chief investment strategist at Robert W. Baird. "All of a sudden, we get a new down leg in yields, and that money is trapped with no place else to go."
The S&P 500 climbed 0.3% to 2137.16, topping its previous record of 2130.82. The Dow Jones Industrial Average rose 80.19 points to 18226.93, not far off the record of 18312.39 also set in May 2015.
The tech-heavy Nasdaq Composite Index rose 0.6% and is nearly in the black for 2016. Some analysts said the tech stocks' gains were a sign investors were embracing riskier parts of the market, which could indicate momentum for the broader rally.
U.S. government bonds pulled back, sending yields higher after Friday's record low for the benchmark 10-year Treasury. Rising stocks and a slate of bond auctions from the Treasury this week pushed the yield on the 10-year note up to 1.434%, compared with 1.366% Friday. Yields rise when bond prices fall.
The simultaneous rally in stocks and bonds has confounded analysts, who had expected higher yields, and is making investing decisions tougher. In one example, using bonds to balance out the risk of stocks in a portfolio doesn't make as much sense as it has historically.
Jim Kochan, chief fixed-income strategist at Wells Fargo Funds Management, said he tells clients not to use long-term bonds like Treasurys to diversify given the risk.
"I don't think they provide a hedge against much of anything at these levels," he said. Mr. Kochan added, "It's been a rule of thumb for so long but I think, where we are now, it has to be re-examined."
The rule of thumb to divide holdings 60/40 between stocks and bonds would have cushioned the big stock plunges in 2001 and 2008. But the padding provided by bonds may be wearing thin. According to calculations from Morgan Stanley, the 10-year Treasury yield would need to fall to negative 0.24% to fully offset a 10% drop in the S&P 500 in a 60/40 portfolio. While that isn't impossible, relying on such a big move downward from levels already near record lows doesn't make much sense, the bank said.
That means investors have few alternatives these days to stocks.
The rising market puts the focus squarely on U.S. companies about to report their results for the second quarter, to see if profit growth can support the market's gains.
"Earnings are going to decide it," said Tom Carter, managing director at JonesTrading. "That is the next big mountain we're looking at."
As of June 30, analysts expected corporate earnings in the S&P 500 to contract by 5.3% from a year earlier for a fifth straight quarter of declines, according to FactSet. Shares of Alcoa Inc. rose 32 cents, or 3.3% to $ 10.50 in after-hours trading after revenue and adjusted per-share earnings beat expectations.
Bank earnings will provide an early test. Wall Street analysts have been steadily lowering their earnings expectations for the sector.
Big U.S. lenders including J.P. Morgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. are among the companies that begin reporting earnings this week.
Financial stocks are the only S&P 500 sector still negative in 2016, in part because low and negative interest rates are squeezing profits at banks. Financial shares rallied in mid-April—including one weekly gain of 4%—after banks cleared dismal earnings expectations in the first quarter, but long-term challenges remain for the sector, which could keep a lid on gains.
The KBW Nasdaq Bank Index of large U.S. commercial lenders is down about 11% this year, while banks in the Stoxx Europe 600 have lost about 31%.
Many investors have been skeptical about stocks all year, and there are signs they aren't ready to pile back in yet. U.S. stock-trading volume was below average for the month and year Monday, with 6.2 billion shares changing hands.
Investors pulled a net $ 4.5 billion from U.S. stock mutual funds in the week ended July 6, according to Lipper data.
On the other hand, companies spent $ 161.4 billion—the second-highest total on record—buying back shares in the first quarter of 2016, supporting stock prices, according to S&P Dow Jones Indices.
Some investors and analysts said the rally highlights the appeal of U.S. equities at a time when the global economy faces an uncertain future after the U.K. vote.
Stability on the political front gave markets in Europe and Asia a lift Monday. Financial assets in the U.K., from the pound to bank shares, rose after Theresa May moved closer to becoming prime minister, capping weeks of uncertainty that have plagued local markets. The FTSE 250, an index of medium-size stocks, hit its highest level since the June 23 vote. The British pound rose 0.4% against the dollar to $ 1.2999.
The Stoxx Europe 600 rose 1.6% and FTSE 100 gained 1.4% and entered bull-market territory.
Shares in Asia also rose, after Japanese Prime Minister Shinzo Abe's ruling coalition won more seats in the upper house. The Nikkei Stock Average added 4%, its biggest one-day gain since March. The dollar jumped 2.2% against the yen to ¥102.808.
"The record today is a reasonable response to the fact that the world looks a little better than it did a week ago," said Russ Koesterich, head of asset allocation for BlackRock's Global Allocation Fund. "But the ability to move higher going forward is going to come down to a better economy and stronger earnings growth."
—Ben Eisen and Riva Gold contributed to this article.
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