Stocks have fallen to multi-month lows not because of a deterioration in fundamentals, but instead
because an overly optimistic outlook has been rattled by geopolitical surprises, heightened U.S. political dysfunction and mega-cap tech earnings that have not met extremely lofty expectations (but weren’t bad in an absolute sense).
As long as those factors (including higher yields) drive the market narrative, stocks will have a hard time rallying, like we saw on Friday.
So, what gets this selloff to stop? A reminder that underlying fundamentals haven’t changed nearly as much as the decline in stocks would imply. And, there are numerous opportunities for economic data and Fed speak to remind markets that underlying fundamentals haven’t deteriorated as much as the drop in the S&P 500 would imply.
First, there is a lot of important economic data this week and if it prints Goldilocks that will be an important reminder that an economic slowdown isn’t likely anytime soon. Specifically, this week’s ISM PMIs and jobs report have the opportunity to provide important Goldilocks data that can remind investors the underlying economy is still solid.
Second, there are several important inflation metrics this week including Unit Labor Costs and the price indices in the ISM PMIs that can reinforce disinflation is on- going and, importantly, remind markets that “Immaculate Disinflation” (inflation falls but growth stays resilient), allowing the Fed to cut rates to support growth, can still happen!
Third, earnings results shift away from mega-cap tech and reinforce that a $240 2024 S&P 500 EPS estimate is still valid, while AAPL earnings remind investors mega cap tech companies are still money printing machines.
Finally, the Fed clearly signals it’s done with rate hikes, giving the market the certainty it needs and taking upward pressure off Treasury yields.
If we get those reminders this week, then a bounce in the S&P 500 back towards or above 4,300 is entirely reasonable, as the S&P 500 is currently trading about 17X 2024 S&P 500 expected EPS of $240 and that multiple is simply too low given current fundamentals. Point being, the ingredients for a solid bounce/rebound are in place, now all markets need is some reminders that, broadly, the macroeconomic environment hasn’t materially changed.
Will we see issues with growth going forward? Will the markets take more seriously the wars overseas? Will earnings be hurt by consumers pulling back? Will the government debt in this country put a damper on growth? And, will the markets climb a wall of worry to new levels?
Those are questions, I will answer in the coming weeks. For now, we are positioning for an end of the year rally.
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