The stock market at its lowest, but…

The stock market at its lowest, but…

Stock markets bottomed out a few weeks ago, but we wouldn’t call that a buyable bottom. The current market faces many risks that have clouded the outlook so much that buying “low” is now a pure gamble. Jamie Dimon said it best when he described the outlook as stormy, then corrected himself to say “hurricane”. Between the fallout from Ukraine, supply chain disruption from China lockdowns, energy prices, inflation and the FOMC, the world faces economic change that will take several quarters, even years to materialize. The good news is that long-term secular trends within the economy are still driving the market, the bad news is the S&P 500 (NYSEARC: SPY) will be in a bear market, if not outright bear market, until these trends can catch up with stock market valuations.

The S&P 500 has confirmed a reversal

The S&P 500 broke through major support the week of May 2 and has since confirmed a market reversal. This reversal was confirmed last week when the market rebounded and stopped at the 30-day short-term moving average. This level coincides with the 4,130 level and the bottom of a consolidation range in place since the middle of 2020. Now, with the reversal confirmed, the consolidation looks like a Head & Shoulders pattern that could drag the market much higher. down. The risk for bears, however, is that institutional and large-capital participants “sold in May and left,” meaning the downward pressure in the market has eased. With this in mind, the market is more likely to have reversed into a sideways trend that will persist through the fall trading season or until the next major catalyst occurs.

This is not a buyable fund for stocks

The next most likely catalyst is inflation data and the FOMC. The PCE price index is due out at the end of the week and it should still be hot. Economists expect headline inflation and core inflation to pick up on a month-to-month basis and they could beat the consensus. Not only are energy prices hitting a 14-year high, but S&P 500 CEOs are still scrambling to offset the effects of higher inflation. The takeaway is that inflation may be moderating now, but it is not expected to go away and there are many reasons to believe it will pick up again later in the year. As for the FOMC, it continues to gain momentum.

Beware of earnings prospects

The biggest risk to the market, the factor that will bring the S&P 500 to its knees, is the earnings outlook. Looking at the market from a valuation perspective, the valuation is based on future earnings forecasts. A downward revision in consensus will drive the market lower. And the outlook is down. While the consensus estimate for Q3 has not budged in recent weeks, the consensus estimate for Q2, Q4 and now fiscal 2023 is down. The consensus estimate for the second quarter has been stable at 4.1% for the past three weeks, but this represents a drop of almost 300 basis points from the peak and we expect it to come down to as the release cycle approaches. And for the fourth quarter and next year? The consensus for the fourth quarter fell 210 basis points over the past week while the outlook for next year fell 230 basis points. No reason to be bullish on stocks, at all.