December 21, 2022
Outlook: Today’s rebound from short-term oversold levels is a welcome development, but a lack of meaningful catalysts should keep a lid on things into year-end. The first week of January includes a number of important macro catalysts including US manufacturing ISM, JOLTs job openings and FOMC minutes on January 4 followed by the monthly Jobs Report on January 6. The Q4 rally met our price objective near 4100 two weeks ago and we turned tactically bearish into Q1 with expectations for a retracement to the October lows in the 3500s. We expect the 4100 level will provide strong technical resistance throughout Q1 and maybe a bit beyond. This year’s bear market was the result of rate-induced multiple compression with any downside from current levels likely the result of lower earnings estimates. The recent steepening of the 2/10 yield curve is partially due to mean reversion in the long bond and possibly concern into calendar Q4 results and guidance. Lower earnings estimates and ongoing Fed hawkishness during Q1 would be strong fundamental headwinds driving the retracement to the 3500s. With ISM manufacturing already in contraction, we expect the multiple compression phase of the cycle is nearly complete with the extent of retracement largely dependent on incoming inflation and labor data. Static multiples and lower earnings estimates generally result in equity downside, but we expect the SPX will find a bottom near 3500 as markets look 9 months ahead at vastly improved liquidity conditions.