S&P Record Is a Show of Faith in Fed

Investors nudged the broad, widely followed Standard & Poor's 500-stock index into record territory Thursday for the first time since 2007.

The index is closely tracked by professional investors and its four-year recovery since 2009 reflects a growing belief that the Federal Reserve's continuing support for markets and the economy will overcome modest U.S. growth and lingering economic and political weakness in Europe.

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A screen over the trading floor displays the final tally for the S&P 500 on Thursday.

Thursday's action�coming on the final trading day of the first quarter�was a small-scale model of the broad debate currently dominating financial markets.

On one side, Italy's difficulty in forming a new government stoked fears that Europe still hasn't dealt with its financial problems, despite the reopening of Cyprus's banks. In addition, new U.S. weekly unemployment claims surprised economists by ticking higher while another report showed soft manufacturing activity in the Midwest.

Offsetting those factors was an upgrade to economists' estimates of economic growth late last year. The revision reinforced a broad investor conviction that Fed stimulus is helping and that the slow improvement will prompt Chairman Ben Bernanke to continue supporting markets for months to come.

The S&P 500 rose just 6.34 points, or 0.41%, to 1569.19, but that was enough to push it past the record 1565.15 hit in October 2007. The Dow Jones Industrial Average rose 52.38 points, or 0.36%, to 14578.54, also ending the quarter at a new high. The Dow returned to record territory on March 5, ahead of the S&P by three weeks.

"It's a symbolic day�it does mean we've recovered from the experience of the past five years," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors, which manages $7.2 billion in assets. "But I don't think anyone should look at today's move and think it suggests an all-clear, and that there are no worries in the market going forward."

This week, New York Federal Reserve Bank President William Dudley said that at some undetermined point, he will favor scaling back the Fed's $85 billion-a-month bond purchases, the backbone of its stimulus.

But Mr. Dudley and Mr. Bernanke remain committed to supporting markets and the economy as long as needed, which makes many investors shrug off the other comments. Eventually, investor complacency could blind them to signals that the rally is ending, but stock buyers are betting that this will happen later.

The Dow is up 11% this year�its best first quarter in 15 years�and some money managers have been selling stocks or hedging positions for fear that stocks are overdue for a pullback. But those trying to show stronger gains than competitors say they must either keep buying stocks or risk falling behind. On Thursday, Wells Fargo Advisors said it was projecting that the S&P 500 could rise as high as 1625 this year.

The firm, an affiliate of Wells Fargo & Co., said it was optimistic about economic prospects. It also was in danger of being overtaken by events: Its previous year-end forecast was for the S&P to go as high as 1575. Wells Fargo's strategists joined those of Goldman Sachs and Morgan Stanley in increasing their forecasts.

The Nasdaq Composite Index, dominated by technology stocks, rose 0.34% to 3267.52 Thursday. It has recovered all its losses from the financial crisis, but remains more than 50% below the record of 5048.62 hit in 2000, during the tech-stock bubble.

The single strongest explanation for stocks' "renaissance" of the past six years has been easy money from the world's central banks, Michael Hartnett, an investment strategist at Bank of America Merrill Lynch, told clients on Thursday.

"Over the past six years there have been 503 global rate cuts, $11.6 trillion of new central-bank liquidity and irrational exuberance in bond markets blessed by policy makers," he said. How much longer will stocks rise "will depend on whether European and Chinese growth expectations recover before reflation in the U.S. and Japan" forces authorities to slow the flow of easy money and kill the rally.

So far, annual inflation has been benign enough that policy makers have largely ignored it, but U.S. consumer prices nevertheless are up 13% since 2007. Stock indexes only recently have moved above their levels of that period, meaning they remain far from records after adjusting for inflation.

Ordinary investors began pushing money back into U.S. stock mutual funds in January and February. Many had sold during the crisis and some appeared to regain confidence as indexes neared records, meaning some had sold low and bought high.

But data from the Investment Company Institute, a mutual-fund trade group, show that net U.S.-stock mutual-fund purchases in March have been inconsistent and weak, raising questions about how enthusiastic the public really is.

The S&P took longer to return to record territory than the Dow partly because the conservatively composed Dow never fell as far at the S&P, which includes a variety of younger, smaller and more-volatile companies. The S&P also is influenced by Apple shares, which have fallen 17% this year.

Because so much of the recovery has depended on the Fed, investors continue to worry that the stock recovery will dry up once the Fed stops pumping money into financial markets.

One reason for investor concern is that the S&P 500, along with most other indexes, has been exceptionally volatile since 2000. In the wake of the financial crisis, it fell to 676.53 on March 9, 2009, down 57% in just 17 months. Just four years later, it has recouped all of that and more.

—Alexandra Scaggs contributed to this article.

Write to E.S. Browning at jim.browning@wsj.com