June 20, 2023
As the S&P 500 has rallied +6.8% over the last five weeks to technically overbought levels, consider markets can stay overbought or oversold for several weeks but consolidation to technical support levels near 4200 should first be considered a healthy development. Month-end and quarter-end rebalancing could be a near-term catalyst for a pullback. We also see the potential for liquidity to become a headwind over the next several weeks as the Treasury General Account (TGA) rebuild accelerates.
The SPX is currently trading at 18.3x FY’24 estimates. The index can sustain an 18.5x forward multiple when there’s no alternative. Unfortunately, the forward earnings yield on the SPX is 5.6% and a six-month T-Bill yield is currently 5.2%. If you exclude mega-cap Tech, the SPX is trading at 16.7x FY’24 numbers, while our favorite cyclical proxy, the S&P Small Cap 600 Index (SML) is only trading at 13.5x.
The SPX needs cyclical sector leadership to sustain higher levels from here. Cyclical sectors are among the worst performing this morning with higher levels dependent on continued evidence of economic expansion. Flash PMIs due this Friday are the most important near-term growth catalysts. Consensus is looking for manufacturing PMI to remain in contraction territory at 48.5. The aforementioned rebalancing should be complete by Thursday’s close with a manufacturing PMI north of 50 driving near-term equity upside.
Meanwhile, the market based probability for a July Fed rate hike rise to 70% after last week’s Fed dot plot implied two additional rate hikes. This comes in spite of a recent string of disinflationary data. The most important reports ahead of the July meeting include May PCE, June Jobs Report and June CPI.
Growth related data is in focus this week with flash PMIs due Friday. Germany PPI for May undershot expectations, while the ECB’s Lane becomes the latest official to push back on September rate hike expectations.