What frightened the S&P 500? Forecast as of 04.01.2024


The revaluation of expectations hurt the broad stock index. Investors started doubting a 150 basis point rate cut in 2024 and the US economy's soft landing. Let’s discuss that and make a trading plan for the S&P 500.

Contents

Weekly fundamental forecast for S&P 500

Markets count on the Goldilocks regime, when the economy is neither cold nor overheated. As corporate profits have stopped declining and the Fed's policy is expected to be eased, the S&P 500 has grown almost 17% from October's lows to December's peaks. However, Goldilocks can be successful only when the market does not factor it in. If investors count on that regime, neither hot nor cold economic results in the US will be helpful.

The biggest risk for the index in 2024 is US GDP growth. The situation reminds me of the beginning of 2023 when recession talks were supposed to drop the S&P 500. However, the economy pleasantly surprised us, and the index rose 4%. This time, we may also have a pleasant surprise, which will exceed the expectations of a soft landing. Indeed, financial conditions haven't been so favorable since the Russian invasion of Ukraine. GDP growth will likely accelerate inflation and resume the Fed's tightening. Bad news for stocks.

US financial conditions

Source: Bloomberg.

However, it's too early to talk about the success or failure of the US economy as we haven't seen new data on employment and inflation. Investors are overwhelmed with optimism. Goldman Sachs predicts the S&P 500 will rise to 5,100, 8% more than the current levels. Seasonality, the end of a corporate profit recession for three quarters in a row, and expectations of a fed funds rate cut are on the broad stock index's side. January is the fourth best month of the year for the S&P 500 as the stock market sees 1.2% average growth at the end of January in 60% of cases.

Seasonal trends of US stock indexes

Source: Wall Street Journal.

The stock index's weak start in 2024 is just due to drastic growth in October-December 2023. Investors started doubting market forecasts of a 150 basis point rate cut and a soft landing. The FOMC's December minutes showed the Fed was not discussing policy easing, while Richmond Fed President Thomas Barkin said a soft landing may not happen. Moreover, when the S&P 500 had a bad start in January, it declined by 2.1% on average in 58% of cases at year-end.

Weekly trading plan for S&P 500

In January, the market can move from Greed to Fear, but whether there will be a sentiment change will depend on December's US employment stats. Real data close to the +163 thousand expected by Bloomberg experts will not allow the S&P 500 bears to develop a correction.

 On the other hand, non-farm payrolls may turn out to be too hot or too cold. In that situation, further pullbacks are inevitable. At the same time, the index's failure to hold above 4,700 will be a reason for sales.

Price chart of SPX in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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