Inside Markets — All-time High

Yesterday’s risk-on rally and all-time high (ATH) in the SPX and NDX followed a Goldilocks ISM services print (improved headline number/lower prices paid) after two weeks of disappointing economic data. Yesterday’s ADP private payroll data came in softer, but still resilient and the combination effectively ended near-term recession concerns and reinstated the ‘growth without inflation’ narrative. It’s important to recognize that ISM collected from a survey and recorded as a diffusion index that measures the breadth rather than depth of responses. And the ADP private payroll report has a spotty track record in terms of predicting official monthly payroll data, which is due tomorrow. In our opinion, the path to rate cuts runs through labor market data and tomorrow’s Jobs Report will be more important catalyst to gauge the Fed’s near-term reaction function. Higher levels in the SPX don’t require rate cuts, but do require Fed willingness to cut rates if economic growth suddenly slows. Wages account for roughly two-thirds of inflation, which makes average hourly earnings the second most important metric in tomorrow’s report. A payroll gain in the +150,000 to +200,000 range and lower-than-expected wage gain (consensus looking for +0.3% MoM) is the bullish outcome for equity markets. Payroll gains below +100,000 or above +300,000 would shift the narrative in a bearish direction and result in a quick retreat from ATHs.

An ATH typically removes selling pressure from overhead supply. The rule of thumb on a new ATH is for an additional ~10% upside, but our price objective of 5415 is only ~1.25% above current levels. An inline payroll gain and lower wage number could bring further upside into view, while a lower payroll gain and inline/higher wage number could take the index to our downside objective in the 5060-5150 range.