S&P 500: A few cautions about the outlook (SP500)

Happy Memorial Day! We also thank all who have served or are currently serving in the military and offer our deepest gratitude and condolences to all who made the ultimate sacrifice to protect our freedoms.

I strong S&P 500/SPX (SP500) and equities in general, I said the following while covering the major stock indexes recently: However, I urge some caution (in the near term) as new negative technical factors emerge.

Did we witness a blowout at the top?

The SPX recently (Thursday) opened near a new all-time high, but the market was down about 0.75% by the end of the session. While this is a positive situation in the long term, the market may need a more pronounced pullback or consolidation phase to digest the recent gains in stock prices.

Technical indicators such as the RSI, CCI and full stochastics also suggest that the market may need to make a further significant move. A consolidation phase before achieving a decisive new high.

This move is consistent with the possibility of increased rotation and consolidation in the 5,300-5,100 range, although the key support range remains at the 5,100-4,900 levels, so we may see more sideways price action before moving to a new ATH again.

What to look out for as you move forward

There is important data Coming this weekConsumer Confidence, GDP, and (most importantly) PCE will be released on Friday. More specifically, it is the core PCE that we are most interested in. The last core PCE was 2.8%, beating expectations of 2.6%. The latest CPI reading was slightly above expectations, and we are hoping to see a similar trend in PCE.

Core PCE declines further

Hopefully, core PCE will be at or below 2.7% y/y. This better than expected reading should generate a favorable reaction from the market, and the recent gains could continue once construction inflation figures are released on Friday. This downward inflation trend is positive and means that lower inflation rates may continue in the coming months, potentially prompting the FOMC to cut rates soon.

FOMC – Rate cut coming soon

about 50/50 chance We expect at least one rate cut before the September 18 FOMC meeting. Also, the likelihood of a rate cut may be skewed too far to the hawkish side at the moment, and as upcoming inflation readings and other constructive data materialize, the likelihood of a rate cut may increase. This dynamic creates a favorable situation for stocks and other risk assets going forward, as more accessible financial conditions increase appetite for risk assets, allowing high quality stock prices to rise.

Is the P/E ratio sustainable?

While P/E ratios of 23x for the SPX and 31x for the Nasdaq 100 may seem high, they could be relatively inexpensive when considering the upcoming macroeconomic environment, growth prospects, alternative asset classes, opportunity costs, and other factors.

The market is expected to experience strong growth, with the S&P 500’s forward P/E ratio at 21.5 and the Nasdaq 100’s forward P/E ratio at 27. Additionally, R2K’s forward P/E ratio of 24 indicates further market expansion and potential outperformance of small/mid-cap stocks, supporting a positive and confident outlook.

If the Fed cuts interest rates, we will see better than expected earnings growth and wider multiples. The current P/E ratio could expand further and valuations may not be so expensive.

Why the market is likely to rise

While many stocks have rallied significantly and are poised for further strong gains, we may see further rotations, consolidation and pullbacks. Still, medium and long-term fundamental factors remain strong, growth is likely to improve and the Fed is likely to cut interest rates soon. Additionally, upcoming inflation data may be better than manufacturers’ expectations, which could increase the likelihood of an earlier cut. This constructive dynamic is why we are maintaining our year-end SPX target range of 5,800-6,000, despite the possibility of increased volatility in the near term.