Bank stress, stubborn inflation, rising recession odds and the fastest Federal Reserve interest-rate hikes in four decades. A lot of things that ordinarily give traders fits have lately been failing to sway the stock market.
(Bloomberg) — Bank stress, stubborn inflation, rising recession odds and the fastest Federal Reserve interest-rate hikes in four decades. A lot of things that ordinarily give traders fits have lately been failing to sway the stock market.
A chorus of investors expects it to last.
In a week that included a key reading on consumer prices, Fed meeting minutes and earnings from three of the country’s biggest banks, equities barely budged. The S&P 500 rose 0.8%, the Nasdaq 100 added 0.1%, and the Cboe Volatility Index dropped below 18 to its lowest level since January 2022.
Chalk it up to information overload. So much is going on that the best strategy has been to sit still. Wall Street stock strategists are frozen in their footsteps: they’ve left their S&P 500 predictions untouched for three months, the longest streak since 2005. Reactions to economic reports that used to jar traders have lately been muted. And while earnings are their usual wild card, a case exists that enough pessimism is built in to cushion their impact.
“This market is frustrating the bears that it won’t go down and retest like many people expect. But I’m not necessarily a strong bull either because the market is trading at a multiple that is relatively high,” said Andrew Slimmon, a senior portfolio manager at Morgan Stanley Investment Management. “I have a hard time seeing the market substantially breaking to the upside, but I don’t think the market’s going to sell off either.”
An improbable peace has prevailed in equities for most of the year, trapping the S&P 500 in its narrowest trading range since the first part of 2017, according to data compiled by Bloomberg. Through Wednesday’s close, there were seven days in a row without a 1% swing in the S&P 500, the longest stretch since November.
All this at the start of an earnings season that Wall Street knows will be rough. First-quarter earnings in the S&P 500 are forecast to fall about 8% from a year ago, according to Bloomberg Intelligence, the biggest decline since the start of 2020. Add to that the fact that stocks have rallied sharply since the last batch of reports and the stage could be set for calm-shattering disappointment.
At the same time, equity investors have had ample opportunity to panic about deteriorating earnings sentiment and have so far resisted. Analysts pegged the first-quarter profit decline at around 1% as recent as three months ago and the forecast has worsened ever since — a particularly violent pace of revisions over a single quarter. Could the bar be low enough now for corporate reports to land quietly? Morgan Stanley’s Slimmon says yes.
“You don’t want high expectations for your companies going into earning season,” he said. “I think the setup for stocks is very, very good.”
The consequences from the failures of Silicon Valley Bank, Silvergate Capital Corp. and Signature Bank are still unfolding. As a result, investors are vulnerable to statements of pessimism about future credit and lending standards. But Slimmon said on Wednesday it’s unlikely the lenders will reveal much. On Friday, JPMorgan Chief Executive Officer Jamie Dimon said “there’s going to be a little tightening. It’s not a credit crunch.”
Market worries over banks were eased by the Federal Reserve’s emergency measures that alleviated strains within the sector. Last month, banks borrowed a combined $164.8 billion from two backstop facilities — including a record $152.9 billion from the discount window — though institutions have since reduced their borrowings.
Global liquidity flows “have actually been friendly to stocks over the course of the last month, which act as a way to hold stock prices up,” said Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald. It’s hard to say when the effect of that will fade, he said.
Johnston sees a potential catalyst around the debt ceiling. Since January, the Treasury Department has been deploying a series of accounting gimmicks in order to prolong its borrowing authority under the statutory debt limit. This includes spending down its cash pile at the Fed and reducing its supply of Treasury bills, which should inject more liquidity into the banking system. Once Congress either raises or suspends the limit, the Treasury will issue more bills to quickly boost its cash buffer, which drains liquidity — a “negative for risk assets” that will likely push stocks lower, Johnston said.
Waiting on Congress to catalyze markets might prove frustrating for analysts eager for price action. Lotfi Karoui, chief credit strategist at Goldman Sachs, said he doesn’t expect a potential resolution to the debt ceiling issue until late July or early August.
There’s also the question of what companies even have the ability to move the S&P 500. The benchmark is now trading at about 19 times estimated earnings, but its top 10 stocks — big tech names like Apple Inc., Microsoft Corp. and Amazon.com Inc. — are trading at an average of about 28 times estimated earnings.
The mega caps’ rich multiples mean it could be hard for them to deliver earnings that move materially higher. As a result, first-quarter results might not do much to the index itself over the next few weeks.
“You would need to have earnings move higher for the market to actually have a lot of upside. And I don’t think that’s going to be the case,” said Slimmon.
Outside of earnings, economic data might inform investors of overall sentiment, but little of it is the kind of “top-tier data” that generally moves markets, Ben Jeffery at BMO Capital Markets said. Even highly anticipated numbers haven’t done much of late. On three of the past four releases of Consumer Price Index data, the S&P has moved less than 0.5% up or down from where it started the day.
If earnings and economic data fail to move the needle, the Fed just might. Markets are pricing in greater than 80% odds for a 25 basis point hike in May. Continued rate hikes and added commentary about inflation fighting “would cause stocks to break to the downside,” according to Que Nguyen, chief investment officer of equity strategies at Research Affiliates.
Not all markets have been as docile as stocks. Last month, the ICE BofA MOVE Index — a closely watched Treasury volatility measure — reached its highest point since 2008. Bitcoin has gained some 80% year-to-date thriving on the banking chaos and oil rallied the most in a year after an unexpected production cut.
Stocks have felt the same forces, but none of them have shaken the S&P 500 out of its holding pattern. Barring drama, the benchmark gauge might just continue its horizontal crawl for the rest of the month.
“Wait and see,” said Goldman Sachs’ Karoui. “Basically, you just need time.”
–With assistance from Isabelle Lee, Denitsa Tsekova, Alexandra Harris and Brad Skillman.
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