For all the supposed anxiety about various types of economic landings, stubborn inflation amid a renewed surge in oil prices, Federal Reserve hawkishness and weak China growth, the S&P 500
will still start Friday less than 2% shy of its 2023 peak.
That’s impressively stoic. Sure, a well-received bumper IPO, like ARM Holdings’
this week was always going to juice sentiment, yet the latest rally has come despite benchmark bond yields
of late the market’s kryptonite, hovering near 16-year peaks.
A clue to why those cycle-high implied borrowing costs are not having the same debilitating impact on sentiment can be seen in the ICE BofAML MOVE index , which tracks expected volatility in Treasurys.
The MOVE this week dropped below 100, its lowest in 18 months and half the level to which it spiked during the regional bank crisis in March.
The more relaxed bond market is reflected in equities, where the CBOE VIX
a gauge of expected S&P 500 volatility, is below 13 and near its lowest since January 2020.
Force of habit requires it to be written that such calmness can be deemed complacency, and as such often proves to be a handy contrarian indicator.
But there are perhaps four important reasons why bulls should hold their ground.
First, the technical. The S&P 500 has just moved back above its 50-day moving average, which is supportive, while even after the decent run it’s 14-day relative strength index, a momentum gauge, is trending up but at 56 sits well below overbought territory.
Next, and alluding to easing angst in the fixed income arena, Fundstrat’s Tom Lee notes that the equity rally, which followed the European Central Bank’s decision to deliver a ‘dovish hike,’ bodes well for when the Fed also signals it is done tightening.
The ECB’s move “and the market’s reaction is a harbinger of the 1982 moment ahead for the S&P 500…the key takeaway is equities went to an all-time high 17 trading days after Volcker publicly considered ‘ending the inflation war’,” says Lee.
There’s another fundamental microeconomic reason encouraging bulls: company profits. As John Butters, senior earnings analyst at FactSet notes, earnings forecasts have been improving over recent months and now the S&P 500’s aggregate third quarter earnings per share are expected to rise 0.5%.
“If 0.5% is the actual growth rate for the quarter, it will mark the first quarter of (year-over-year) earnings growth reported by the index since Q3 2022,” says Butters in his latest note.
Finally, among the most important prerequisites for a sustained bull run is firepower. It can mean that when new highs are made there’s still sufficient cash to support the trend.
So, consider the chart below from Stephen Suttmeier, technical research strategist at Bank of America. It shows the amount held in money market funds has hit a fresh record of $5.625 trillion .
“Investors love cash,” he says, but at 5% cash lags the year-to-date return for the S&P 500 of about 17%. “Since the SPX can continue thrive after solid returns for 1H and YTD through August, it would not surprise us to see investors put cash to work and fuel a rally into year end,” Suttmeier concludes.
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Some $4 trillion of derivatives linked to stocks, index options and futures will mature on Friday. The so-called ‘triple witching’ event coincides with a re-balancing of indices such as the S&P 500
Instacart has raised its IPO price target to $28 to $30 a share from $26 to $28 previously. The move comes after Arm Holding’s successful IPO on Thursday.
are down 2% even after the software company forecast revenue in line with Wall Street estimates and steady margins.
U.S. economic data on Friday include August import prices and the Empire State manufacturing survey for September, both due at 8:30 a.m. Eastern. Industrial production and capacity utilization reports for August will be released at 9:15 a.m., followed at 10 a.m. by the preliminary reading of August consumer sentiment.
Asia stock markets
were chipper after data showed China’s industrial production and retail sales improving in August.
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