• The S&P 500 index rallied following the June CPI report
• Wall Street strategists have a bearish outlook for the final six months of 2023
• Stock market investors should focus on the dollar's future direction

The US inflation report for June 2023 released this week triggered a massive rally in the S&P 500 index. At one point during yesterday’s US trading hours, the S&P 500 index posted 14 consecutive positive candlesticks on the 4h chart.

Also, the index was up 685 points since the start of the trading year, hitting a 52-week high. Moreover, VIX, the fear index, is at its lowest level since 2020.

So why are Wall Street strategists so cautious about the US stock market? In fact, they have never been more bearish on the year’s final six months than they are now.

Is this a contrarian signal, or should we prepare for bears to fight back?

Whenever Wall Street strategists were expecting a negative final six months, stocks rose

Looking back at past data, one may observe that a negative outlook for the year’s final six months is a contrarian signal for the S&P 500 index.

Only four times did Wall Street strategists have such a bearish outlook – in 1999, 2019, 2020, and 2021. The outcome? The S&P 500 index rose 7%, 9.5%, 21.2%, respectively 10.9% in the final six months of those years.
 

A weak dollar should help equities

Another trend we’ve seen this week was the US dollar weakness. The greenback is at its lowest level of the year against the EUR or the GBP.

That is not to say that the dollar’s weakness should continue, but if it does, it bodes well for stocks.

Historically, earnings strengths are correlated with the greenback’s weakness. It means that if the dollar continues to sink, it will give a nice tailwind over the coming quarters to earnings and so, to the S&P 500 index.

The only problem here is that everyone seems to be bearish on the dollar. After all, the Fed had paused the tightening cycle in June, inflation is slowing down nicely, and the last jobs report missed expectations.

But whenever the consensus is so strong in one direction, the market tends to do the opposite. Hence, for S&P 500 investors, it is more important to focus on the dollar’s direction in the next six months in order to find out where the S&P 500 goes next.

More By This Author: