S&P 500 really did run higher regardless of further FRC and KRE weakness outdoing XLF, which instead turned up. Quoting yesterday‘s premium stock market analysis:

(…) 3,958 would continue acting as support – one which wouldn‘t be jeopardized in the least today. Close above 4,015 seems baked in the cake, and the degree of non-cofirmations and sectoral clues (XLF, KRE, XLK and XLU with XLP chiefly today), are key. The unprofitable tech rally accompanied by semiconductors isn‘t inspiring my confidence – the bond market caution carries more weight to me.

S&P 500 indeed approached 4,045 at close, and bonds confirmed their risk on a couple of hours before the close. Tech finished on an (a bit too) strong note given that semiconductors lagged on a daily basis. Markets are a bit too complacent and much attentive to pivot calls – such a turn won‘t come this soon. The short end of the curve has though acknowledged that a 25bp hike is coming and is betting that it would force the Fed into statements mirroring ECB's „resolve“ (Lagarde – „we‘re neither committed to raising further nor are we finished with raising rates“).

This seems to me a bit premature, as much as expecting hints of possible restrictive monetary policy pause – or better yet, outright „promises“ of significant rate cuts with terminal Fed funds rate at 5 or perhaps 5.25%. Sounds like a pipe dream, and for all the stock market resiliency around the 200-day moving average, S&P 500 bulls are to be disappointed.

The earnings recession hasn‘t been discounted yet when it comes to Q2 and ahead, the job market is still historically hot (and nominal wage growth for all its tiny recent retreat likewise), and the short-term respite in energy prices is increasing real economy‘s capacity to deal with further rate hikes as from the inflation standpoint, the Fed hasn‘t overtightened – no matter the tightening effects not having played out yet in the real economy. As not only today‘s UK inflation data show, The Fed can‘t possibly throw in the towel this early, as that would mean repeating the 1970s mistakes eventually leading to unanchored inflation expectations.

At the same time, LEIs keep pointing lower, making this a highly unlikely moment for the birth of a new bull market. Just look at the recent manufacturing and non-manufacturing data with new orders, and it‘s clear the real economy is showing increasing signs of stress, leading to a Q3 recession and the necessity to downgrade earnings projections, resulting also in the P/E ratio decline.

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Let‘s move right into the charts (all courtesy of www.stockcharts.com).
 

S&P 500 and Nasdaq Outlook

4,015 are likely to be broken to the downside later today, and 3,980 would be another bearish objective (3,958 would require a truly hawkish press conference). On the upside, we‘re unlikely to see a close above 4,045 even if the Fed turns decently dovish (unlikely).

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