Can Wall Street’s bulls keep climbing a ‘wall of worry’?

Federal Reserve Chair Jerome Powell has a clear message for investors: Don’t stress. We’ve got this.

What’s happening: At a press conference Wednesday, Powell reiterated that the central bank does not plan to roll back its massive stimulus efforts until the economic recovery from the pandemic is complete. Wall Street cheered his remarks, sending stocks to fresh records.

But by Thursday morning, the mood had changed. Investors dumped US government bonds, sending the yield on the benchmark 10-year Treasury up to 1.738%, the highest level in more than a year. Nasdaq Composite futures fell sharply, indicating tech shares could be primed for another drop.

The shift displays the mental tug-of-war playing out across markets. While many investors are gearing up for an economic boom later this year, anxiety is growing about adverse side effects — namely inflation, which could force the Federal Reserve to raise interest rates or taper bond purchases sooner than expected.

“Strong economic growth — the kind we have been expecting since last summer, closes the output gap and leads to inflationary pressure,” Bank of America’s equity strategists told clients Wednesday. “No surprises there.”

The economic picture is brightening. Thanks to President Joe Biden’s $1.9 trillion stimulus package and the vaccine rollout, Fed officials now project that US gross domestic product, the broadest measure of economy activity, will climb 6.5% this year, more than the 4.2% projected in December.

Meanwhile, the unemployment rate is expected to fall to 4.5% by year-end. By 2023, the jobless rate could be back at 3.5%, where it sat before the pandemic hit.

We’re not there yet, Powell acknowledged. Another 700,000 first-time claims for unemployment benefits are expected in Thursday’s report from the Labor Department. That would be the lowest number of claims since the pandemic started, but still well above the 200,000-some claims typically registered before the virus arrived.

The Fed chair emphasized that the central bank plans to scrutinize the latest data when making decisions instead of relying on projections.

“We’ve said that we would continue asset purchases at this pace until we see substantial further progress,” Powell said. “And that’s actual progress, not forecast progress.”

Even so, some on Wall Street are wondering if the Fed’s choice to sit tight — potentially through 2023 — could mean it’s forced to take more dramatic action down the line, and fear that inflation could stick around longer than officials think.

“At the moment this is all fine if the Fed’s assumption that any inflation is transitory is proved correct,” Deutsche Bank’s Jim Reid told clients Thursday. “However, if the market doubts the transitory nature of inflation at any point that’s when the fun and games start.”

The team at Bank of America is more sanguine. “There is always some reason or the other since the start of this bull market to complain,” its strategists said. They think investors can climb the “wall of worry,” though, given that markets are awash with cash and corporate earnings growth looks primed to jump. Their advice? “Stay bullish.”

SPAC fundraising is up an insane 2,000% from a year ago

The SPAC market is so hot that this year’s fundraising haul has already surpassed what was brought in during the entirety of 2020.

Now, the world’s biggest asset manager is expressing concerns, my CNN Business colleague Matt Egan reports.

“If you look at the SPAC market, there’s some really attractive new companies and new technologies coming to the market that are financing effectively,” BlackRock executive Rick Rieder told CNN Business. “And then there are some that make no sense.”

Rieder, BlackRock’s chief investment officer of global fixed income, urged investors to use caution before entering this space.

“You’ve got to be really selective about where you go and not just jump onto that train because it’s gotten crazy,” he said.

Remember: Special purpose acquisition companies — or shell companies that exist purely to take private entities public — have become all the rage on Wall Street. Even celebrities like Alex Rodriguez and Jay-Z have launched SPACs to capitalize on the trend.

US-listed SPACs have raised $83.1 billion so far this year, according to Dealogic. That is up 2,031% from the same point last year. As of Tuesday, the 2021 SPAC market exceeded 2020’s total of $82.6 billion.

One concern is that the amount of SPAC money hunting for merger candidates may exceed the number of quality private companies that could be scooped up.

Rieder pointed out that some SPACs are going public with lofty valuations of 40 or even 50 times their revenue. “There’s no chance you could ever grow into that,” he said.

Volkswagen shares are soaring as the carmaker takes on Tesla

Volkswagen’s shares have skyrocketed an eye-popping 22% this week as investors throw their weight behind the automaker’s electric ambitions.

The latest: Tesla could be matched sale-for-sale by Volkswagen as early as 2022, according to analysts at UBS, who predict that Europe’s biggest carmaker will go on to sell 300,000 more battery electric vehicles than Tesla in 2025, my CNN Business colleague Charles Riley reports.

Ending Tesla’s reign would be a huge milestone in Volkswagen’s transformation into an electric vehicle powerhouse. Badly burned by its diesel emissions scandal in 2015, the company is investing €35 billion ($42 billion) in electric vehicles, staking its future on new technology and a dramatic shift away from fossil fuels.

“Tesla is not only about electric vehicles. Tesla is also very strong in software. They really run the car as a device. They are making good progress on the autonomous thing,” Volkswagen CEO Herbert Diess told CNN’s Julia Chatterley this week. “But yes … we are going to challenge Tesla.”

UBS analysts told reporters last week that investors have failed to appreciate the speed at which Volkswagen is gaining ground on Tesla, and how much money the German company stands to make by going “all in” on electric cars before other established players including Toyota and General Motors. The bank has hiked its target price for Volkswagen shares by 50% to €300 ($358).

Up next

Dollar General and Weibo report results before US markets open. FedEx and Nike follow after the close.

Also today: Initial US jobless claims post at 8:30 a.m. ET.

Coming tomorrow: A big week of central bank announcements closes out with the Bank of Japan.