The Stock Market Is Looking Vulnerable. It Could Be the Start of a Summer Slump.
Memorial Day is here, but don’t expect these to be the lazy days of summer. The outlook for the market is uncomfortably hazy.
Sure, May hasn’t lived up to its reputation for being the time to sell and go away. Despite some recent volatility, the Dow Jones Industrial Average is still up more than 3% this month, while the S&P 500 index and Nasdaq Composite have gained 5% and 8%, respectively. All three indexes are near record highs.
But it’s hard to ignore this past week’s wild swings, which even Nvidia’s strong earnings couldn’t prevent. The Dow, off more than 2%, took the brunt of the pain, while the S&P 500 and Nasdaq both endured big fluctuations. This coming week won’t offer much to change the narrative. There’s a smattering of earnings releases on the coming calendar, with Costco Wholesale, Salesforce, HP Inc., and Dell Technologies set to report. Investors will also have the latest consumer confidence report, the Federal Reserve’s Beige Book, weekly jobless claims, and a revision of first quarter gross-domestic product to digest.
That means waiting for Friday, when the government’s personal income and outlays report for April, which includes the latest PCE price index reading on inflation, will be released. Dan Genter, CEO and chief investment officer of Genter Capital Management, says investors need to pay particularly close attention to the core number, which excludes food and energy costs, and is expected to rise 2.8% year over year, unchanged from the previous month. That’s too high for the Fed’s liking, Genter told Barron’s, and suggests that the Fed won’t be easing monetary policy anytime soon.
“We’re going to see rates higher for longer. We may not get any cuts at all this year,” Genter says. With that in mind, he says investors might want to position their portfolios defensively. He’s been buying beaten-up healthcare stocks such as CVS Health and Bristol Myers Squibb.
And even if the Fed does cut, investor expectations for how far those cuts go may be unrealistic, says Roger Aliaga-Diaz, chief economist of the Americas at Vanguard Group. He thinks the market hasn’t adjusted to the notion of higher-for-longer rates, adding that when the Fed does start cutting, it’s unlikely to bring rates back to pre-Covid levels of 1.5% to 1.75%.
That’s not good news for an S&P 500 whose valuation—at around 22 times 2024 earnings forecasts—is starting to look a bit stretched. That’s why Aliaga-Diaz expects more choppiness in the coming months as well. “We do believe the market is overvalued right now,” he says. “The risk for stocks is to the downside.”
And it’s not just rates and inflation that could knock it down, according to David Bianco, chief investment officer for the Americas at DWS Group. “The S&P may pull back a bit in the summer before the election,” he says, adding that “global geopolitical flare-ups could roil the market” as well. He says the S&P 500 could fall to 4800—a 9% drop from current levels, which just misses qualifying as an official correction.
That would qualify as a summer to remember—just not in a good way.