S&P 500 WEEKLY OUTLOOK: SLIGHTLY BEARISH
- S&P 500 fails to sustain upward momentum seen at the tail end of May, finishes the week lower
- Despite better and more reasonable valuations, there aren’t very strong reasons to show bullishness at this time
- May U.S. inflation data will be the next big catalyst for stocks
U.S. stocks were unable to sustain the upward momentum seen at the tail end of May and finished the week slightly lower as sentiment began to sour again. JP Morgan CEO Jamie Dimon’s comments cautioning investors to prepare for an economic “hurricane” contributed in part to the bearish mood. Elon Musk echoed that sentiment and warned that he has a “super bad feeling” about the economy, reinforcing the prevailing negative narrative. When it was all said and done, the S&P 500 lost 1.2%, while the Nasdaq 100 declined about 1%.
Despite the economy’s resilience, investors remain very worried about the outlook, fearing that the Fed could trigger a hard landing in the process to curb inflation – a bad outcome for corporate earnings. The latest dataflow, rather than reassuring the market that the Armageddon scenario is still farfetched, has traders speculating that the U.S. central bank will have to step on the gas and raise borrowing costs more forcefully to restore price stability over the forecast horizon. For this reason, U.S. Treasury rates have resumed their ascent, with the 2-year yield starting to push back towards its cycle highs in the past few trading sessions.
With so much uncertainty, there is no winning on Wall Street these days, nothing satisfies traders. We have reached a point where good data is interpreted as a sign that demand remains strong and will lead to more inflation, and wherebad data is taken as a harbinger of recession. Against this backdrop, volatility could remain elevated and cause sporadic bouts of turbulence, making it very difficult for stocks to stage a significant recovery.
Looking ahead, the week starts off light on economic releases, but ends loaded with the May consumer price index report and the June Michigan consumer confidence survey due out on Friday. For sentiment to improve meaningfully, inflationary pressures will have to continue to ease and convincingly show that the worst is over. With energy costs back on the rise, May headline CPI is expected to remain unchanged at 8.3% y-o-y, but the core gauge is seen moderating to 5.9% y-o-y from 6.2% y-o-y in April. The lower the number for those indicators, the better for risk assets.
Focusing on the S&P 500, valuations have compressed and are now more reasonable following the 2022 sell-off. For instance, the forward 12-month P/E ratio has dropped from 22x at the beginning of the year to 17x, mostly aligning with the 10-year average. Although some of the froth has been removed from the market, there is still not much reason to be optimistic, especially with little interest from large investors to redeploy capital into equities. In this environment, the S&P 500 is likely to remain subdued in the near term.
S&P 500 DAILY CHART
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—Written by Diego Colman, Market Strategist for DailyFX