Wall Street is bracing itself for potential turbulence as the S&P 500 index experienced significant sell-offs last Friday, prompting analysts to question the strength of the dip-buying trend seen over recent months. This downturn, which occurred after the release of weak economic indicators, challenges the habit of investors who have been quick to buy the dip following declines.
According to Bloomberg, the S&P 500 had not seen consecutive declines of more than 1% for 35 sessions prior to this latest rout—a remarkable streak since late December. This raises concerns about whether this pattern can continue amid mounting inflation risks, as traders speculate on the Federal Reserve’s next moves.
The sell-off was fueled largely by disappointing data, particularly from the US Flash Services PMI report and the Final University of Michigan Consumer Sentiment survey. The latter revealed long-term inflation expectations soaring to highs not seen for 30 years, sending the market reeling. The overarching fear is centered on the Federal Reserve's response, as any indications of their hesitance to cut rates could exacerbate market volatility.
Technical analysis suggests the S&P 500 is facing mounting pressure as it pulls back from its all-time highs. Analysts point to support levels around 5960, which buyers may seek to defend. Chart patterns indicate sellers are prepared to drive prices lower, increasing bearish sentiment. Data from Friday highlighted how the market may respond to incoming economic reports, including employment and consumer inflation reports, which are expected before the Fed's next decision on monetary policy.
Looking forward, many eyes are on the upcoming Personal Consumption Expenditures (PCE) Price Index report set to be released this week. This index, observed closely by the Fed as its preferred measure of inflation, is anticipated to show signs of persistence, as analysts predict month-over-month growth of 0.3%, exacerbated by reports of rising prices across various sectors.
Inflationary pressures have remained prevalent, particularly within the service sector, which poses challenges for stock performance. The recently surprised expectations around core PCE figures suggest inflation may not be cooling as fast as some hope, resulting in trepidation among investors.
Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic are scheduled to speak this week, and their comments could offer clues on how inflation data will affect future rate decisions. The Fed’s cautious stance, following its pause on rate cuts this January, keeps traders on edge as markets continue to react to data.
Many market participants are cautious, anticipating potential volatility as the PCE report approaches. If inflation data exceeds expectations, the threat of tighter monetary policy looms large, potentially leading to higher Treasury yields and pressuring equity markets. Particularly, high-growth sectors are viewed as vulnerable to rising interest rates.
Yet, there is also cautious optimism among traders. Futures indicate some potential for market recovery following last week’s losses. The S&P 500, though near its historic highs, may face challenges if the inflation narrative shifts. Markets are eagerly awaiting broader trends based on PCE results and other significant economic indicators, contributing to the cautious atmosphere surrounding future trading sessions.
Recent quarterly earnings reports reveal mixed signals. The forward estimates for S&P 500 earnings show resilience, with projections for Q4 2024 EPS growth rising significantly. Early expectations stood at +9.5% for earnings growth, but actual figures indicate potential growth could reach upwards of +15.7%. Despite downward revisions for 2025 growth estimates, analysts remain optimistic, citing precedents of stronger than anticipated quarterly performances following declines.
This conundrum of strong earnings quarter-to-quarter, juxtaposed against the backdrop of inflation concerns and uncertain Fed policy, continues to affect market sentiment. The notion of near-term economic volatility, underscored by anticipated PCE data, reflects the tentative nature of the current market. Perhaps the upcoming earnings reports, alongside pivotal data releases, will dictate which direction investors will steer.
Market analysts stress the importance of maintaining diversified portfolios as unpredictable inflation outcomes and elevated interest rate fears loom over markets. Investors are advised to remain vigilant, responding strategically to market fluctuations driven by economic data and Fed policy.
With these economic parameters under consideration, the next week promises to be pivotal for the S&P 500 as it navigates through turbulent waters—testing both investor resolve and the optimistic sentiment borne from previous dip-buying habitudes.