S&P 500: Some caution about the future (SP500)

Happy Memorial Day! I would also like to thank everyone who has served or is serving, and to express my deep appreciation and condolences to everyone who has made the ultimate sacrifice to protect our freedoms.

I was rising On the S&P 500/SPX (SP500) and stocks in general are covering the major averages recently. However, I have to express some caution (in the near term) as new negative technical factors emerge.

Have we witnessed an explosive summit?

The SPX opened around a new ATH level recently (Thursday), but the market was down about 0.75% by the end of the session. Despite the constructive long-term setup, the market may need a more pronounced pullback or consolidation phase to accommodate the recent rise in stocks.

Technical indicators such as the RSI, CCI, and full stochastic also indicate that the market may need a larger indicator. The consolidation phase before achieving critical new highs.

This dynamic is consistent with the possibility of further rotation and consolidation in the 5,300-5,100 range while the critical support range remains at the 5,100-4,900 level. Therefore, we could see more sideways price action before moving to new ATHs again.

What are we looking for as we move forward?

We have some important data Coming this week. Consumer confidence, GDP and (most importantly) personal consumption expenditures will be announced on Friday. More specifically, it is the basic PCE that interests us most. The latest core PCE rate was 2.8%, higher than the estimate of 2.6%. The latest CPI reading was slightly better than expected, and we want a similar trend for the PCE index.

Basic PCE to reduce further

We would ideally see a core personal spending rate of 2.7% y/y or less. This better-than-expected reading should foster a positive reaction from the market, and we could see an extension of the recent rally, knowing that construction inflation figures will be released on Friday. This trend of lower inflation is positive and suggests that we may continue to see lower inflation readings in the coming months, enabling the FOMC to cut interest rates soon.

FOMC – Ready to Cut Soon

There are about a Probability 50/50 We will see at least one rate cut at/by the September 18 FOMC meeting. Also, the odds of a rate cut could be skewed more towards the hawkish side now, and we may see the odds of a rate cut increasing as future inflation readings and other constructive data emerge. This dynamic creates a favorable backdrop for stocks and other risky assets going forward, as an accessible monetary environment should lead to increased appetite for risky assets, allowing for higher prices for high-quality stocks.

Are P/E ratios sustainable?

While the P/E ratios for the SPX 23 and Nasdaq 100 31 may seem expensive, they can be relatively cheap, subject to the upcoming macroeconomic environment, growth prospects, alternative asset classes, opportunity costs, and other factors.

The market is poised for strong growth, with a Forward P/E ratio of 21.5 for the S&P 500 and 27 for the Nasdaq 100. Furthermore, R2K’s Forward P/E of 24 indicates the potential for further expansion in the market and small and midcap companies. Ceiling superior performance, which promotes a positive and confident outlook.

We could see better than expected earnings growth and multiple expansions as the Fed cuts interest rates. Current P/E ratios could expand further, and valuations may not be as expensive.

Why is the market likely to move up?

The prices of many stocks have risen significantly, and although there should be a significant uptrend ahead, we may see more rotation, consolidation and pullbacks. However, medium and long-term fundamentals remain strong, with growth likely to improve and the Fed likely to cut interest rates soon. Furthermore, we may see the prospects for a cut soon increasing, as future inflation data may come in better than the policymaker expects. Given this constructive dynamic, I maintain my year-end SPX target range at 5800-6000 despite the potential for further volatility in the near term.