Stocks Are Under Pressure as Key Inflation Week Begin

At the commencement of a week poised to deliver crucial inflation data influencing Federal Reserve decisions, Wall Street traders encountered limited incentives to propel the stock market further. Equities underwent a retreat on Monday, prompting investors to scrutinize whether the recent rise in consumer prices represents a transient blip or signifies a potential halt to the disinflationary trend. Following 16 instances of reaching record highs this year, the S&P 500 is displaying indications of overheating, prompting warnings of an imminent consolidation in the absence of fresh catalysts.

‍

Jason De Sena Trennert from Strategas remarked, "It would be natural to expect some fly in the ointment, some monkey in the wrench, to bring investor expectations back to Earth." He noted that stock prices, credit spreads, and the prices of gold and Bitcoin indicate that monetary conditions are still far from restrictive.

‍

The S&P 500 hovered around 5,100, with Boeing Co. extending its 2024 decline to over 25%. Meta Platforms Inc., the parent company of Facebook, slid by 4%, while Tesla Inc. witnessed a rise after last week's selloff. Treasury two-year yields exceeded 4.5%, and Bitcoin reached $72,000.

‍

In the U.S., inflation likely subsided gradually last month, accompanied by a rebound in retail sales. This suggests that the Federal Reserve is in no hurry to lower interest rates. Paul Nolte at Murphy & Sylvest Wealth Management anticipates increased volatility surrounding these releases as investors continue to decipher the trajectory of interest rates.

‍

Despite recent deceleration, the S&P 500 has recorded gains in 16 of the past 19 weeks, propelled by an improved earnings outlook and a resilient U.S. economy. However, these gains could be jeopardized if Tuesday's consumer price index reading maintains the persistent inflationary trend.

‍

Although the S&P 500 has only fallen on four CPI reporting days in the past 12 months, volatility during these sessions has intensified this year. Over the past six months, the equity gauge has exhibited approximately 0.8% movement in either direction on CPI release days, the highest since April and up from less than 0.5% in September.

‍

Several Wall Street sentiment indicators now signal an increasing level of market frothiness, according to Sam Stovall at CFRA. Notable indicators include the American Association of Individual Investors' member survey revealing an "unusually high" level of bullishness and the CNN Fear/Greed Indicator registering "extreme greed." Stovall also pointed out that the percentage of S&P 1500 sub-industries trading above both 50- and 200-day averages has reached a level indicating an overbought market.

‍

Stovall concluded by citing historical patterns, stating, "Despite these 'tiny bubbles,' history reminds us that post-recovery digestions of prior gains averaged 8% and were followed by a subsequent bounce of 10.6%." He suggested that even though the S&P 500 is due for a consolidation of recent gains, history suggests not waiting too long before adding to holdings.

‍

The rapid ascent of U.S. equities since October has led to comparisons with the late 1990s boom-and-bust cycle. However, strategists at Bank of America Corp. assert that the S&P 500 currently "lacks signs of a bubble" at this stage. BofA strategists led by Savita Subramanian noted that sentiment has warmed up on equities since mid-2023 but is not at bullish levels seen at prior market peaks. They expressed confidence in the durability of the ongoing bull market.

‍

Meanwhile, the group of Wall Street strategists dismissing concerns about a bubble in U.S. technology megacap stocks is expanding. JPMorgan Chase & Co. highlighted that valuations of the seven tech giants driving the record-breaking rally are currently lower relative to the rest of the S&P 500 than the average of the past five years. Strategist Mislav Matejka noted that while there is concern over the strong outperformance of these tech giants, they are trading less stretched than in previous years, given their earnings delivery. The group, often referred to as the "Magnificent Seven," includes Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc. Their current price-to-earnings ratio remains near the average since 2015, suggesting a less inflated valuation despite being relatively stretched.

‍