S&P 500 Forecast: With end of bear market, stocks gain ahead of interest rate decision
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- S&P 500 has broken out of bear market, now awaits FOMC meeting.
- Fed Chair Jerome Powell and the FOMC board will make a decision on the fed funds rate on Wednesday.
- The market is heavily counting on a pause in rate hikes, CME’s FedWatch Tool shows a 76% probability of the Fed pausing.
- US CPI will be released on Tuesday with consensus for core inflation to drop to 5.3% YoY.
The S&P 500 index is beginning the week on a positive note. The S&P 500 index rose 0.2% early Monday, while its NASDAQ Composite counterpart advanced 0.4%.
The vast majority of analysts, traders and observers expect the Federal Reserve (Fed) on Wednesday to pause its rate hiking cycle for the first time since it began raising interest rates back in the Spring of 2022. A pause would be bullish for stocks, and the S&P 500 ended its 18-month bear market last week in expectation of investment leaving the sidelines. Still, the Fed may be greatly influenced by data from the US Consumer Price Index (CPI) that arrives on Tuesday.
S&P 500 News: The bear is broken
Last Thursday, the S&P 500 officially ended its bear-market reign. This was in fact the longest bear market for the index since the one that lasted from the end of World War II until 1948. Approximately 18 months long in its entirety, the bear market lasted from January 4, 2022 until it was broken on June 8, 2023.
That was the session when the S&P 500 closed at 4,293 – just above the 20% market from its nadir on October 13 or last year. Bear markets are considered a fact once a stock or index drops 20% from its all-time high. To end the bear market, the stock or index needs to regain 20% off of its lowest point since the bear market began. That lowest point last October 13 was 27% off the January 4 high at 4,818. Both the Dow Jones and the NASDAQ have already ended their respective bear markets, so the same for the S&P 500 gives investors the idea that a true bull market is about to raise all boats.
Plenty of money that has been stashed away in money market funds and US Treasury bills may soon begin to seep back into the equity market, especially if the Federal Reserve does indeed pause on Wednesday. The fed funds rate is currently sitting in a range between 5% and 5.25%. CME’s FedWatch Tool gives a 24% probability that the Fed hikes rates to a range between 5.25% and 5.5% and a 76% chance that the central bank will leave the fed funds rate as is.
May US CPI is the only hurdle standing in Fed’s way
The one thing that could change the market’s – and the Fed’s – mind about interest rates is Tuesday’s May CPI data. Though it is not the most important survey the central bank uses, the CPI arriving on the first day of the two-day FOMC meeting could still have the effect of influencing the final decision.
Much higher Initial Jobless Claims reported last week and the Unemployment Rate rising from 3.4% to 3.7% has given most market participants the view that an easing labor market should give the Fed enough leeway to pause its hiking cycle. A much higher inflation signal on Tuesday would pretty much throw the market into chaos however.
Wall Street consensus expects core inflation in May to drop to 5.3% YoY from April’s 5.5% reading. This would mean another 0.4% MoM core reading. The headline figure is expected to demonstrate a much more pronounced pullback with the YoY figure dropping from April’s 4.9% to May’s 4.1% and rising just 0.2% MoM.
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Earnings of the week
Monday, June 12 - Oracle (ORCL)
Wednesday, June 14 - Lennar (LEN)
Thursday, June 15 - Adobe (ADBE), Kroger (KR)
What they said about the S&P 500 – David Koston
Goldman strategist David Koston announced that he is raising his S&P 500 year-end target to 4,500 from 4,000. Koston now expects a “general valuation re-rating” that will lift the multiples of a broad range of stocks closer to the valuations of the large mega caps that have provided much of the index’s rally this year.
"Our unchanged 2023 EPS forecast of $224 assumes a soft landing and is above the top-down consensus of $206.”
S&P 500 forecast
The S&P 500 retracted on Friday after touching the 4,325 resistance level that stems from August 2022. We have been focused on this price level for months, so it is fascinating to see how it has retained significance 10 months after its last familiarity.
Arguably, S&P 500 traders will want to see a close above this level for confirmation. There is plenty of support nearby though. The 9-day moving average is rising to last week’s supportive ledge that surrounded 4,265. The 21-day moving average is also not too far off at 4,200 – the top of the last resistance zone.
If the S&P 500 breaks through and closes above 4,325 this week, bulls will be expecting a steady move toward the 4,600 resistance area in the latter half of the year. That resistance zone pushed index price action down on multiple occasions during February and March of last year.
SP 500 daily chart
