Dow Jones, Nasdaq, S&P 500 weekly preview: Investors are positioning for a Fed pivot

The S&P 500 closed nearly 2.7% higher last week after softer-than-expected wage growth sparked a rally in risk assets. Inflation fell to 6.5% in December year-over-year, down from 7.1% in November and a 9.1% peak in June.

The index is now testing the key descending trend line that connects lower lows with many analysts pointing to this zone as a key resistance area for the S&P 500. Futures are trading nearly unchanged in pre-open Tuesday.

Nasdaq Composite Index (IXIC) rallied 4.8% to close above 11000 for the first time since early December. The index recorded the biggest weekly gain since November on the improving risk sentiment for tech stocks.

Dow Jones Industrial Average (DJI) closed the week 2% higher as the bulls attempt to extend the rally to 35000, which was the last time seen in April 2022.

Q4 earnings off to a tough start

The Q4 earnings season is underway after several big banks reported on Friday. JPMorgan (NYSE: JPM) and Bank of America (NYSE: BAC) both topped analyst expectations while Wells Fargo (NYSE: WFC) posted disappointing results, driven by higher-than-expected expenses.

JPMorgan CEO Jamie Dimon said that while the U.S. economy “currently remains strong,” he sees headwinds facing the world’s largest economy.

“However, we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening,” Dimon said.

Goldman Sachs (NYSE: GS) stock is down today after the banking giant missed Q4 revenue estimates, while Morgan Stanley (NYSE: MS) posted better-than-expected top-line results. Later this week, Netflix (NASDAQ: NFLX) is due to report on Thursday after market close with shares enjoying solid few weeks.

What are analysts saying about U.S. equities?

Vital Knowledge: “Our view is still more bullish than most, largely because disinflationary forces are strengthening faster than the backdrop for earnings is deteriorating, a dynamic that should keep a bid beneath equities. And there is now a sizeable positioning-driven tailwind as bearish investors are forced to reckon with the growing odds of a “soft landing” environment. However, the ~4100 level on the SPX will remain a difficult one to surmount.”

Credit Suisse: “Stock prices have increased 11.8% since October 12, the result of falling inflation and interest rates, expectations of a Fed pause, and declining recession risk. While 4Q earnings season has just begun, the 6.6% beat rate thus far should be added to the list of market tailwinds.”

JPMorgan: “It appears that investors are increasingly positioning for Fed rate cuts (as implied by the forward curve) vs. believing in the Fed dot plot (no rate cuts in 2023).”

Bank of America: “FMS [Fund Manager Survey] investors see the S&P500 price at 3892 in 12 months (vs 3999 today). 37% see the S&P500 > 4000 in next 12m vs 57% < 4000.”

Citi: “The recent direction has been clear in both prices and positioning, but net positioning remains slightly bearish on both the S&P and Nasdaq indexes. The rally has left all shorts in loss and an unwind of the $13bn shorts could support the rally near term. More importantly, given the starting point, the current positioning does not look extended and there is room, as far as positioning dynamics go, for this rally to build for longer.”

Goldman Sachs: “After a strong rally year-to-date, we remain cautious on equities. While we expect a turning point in markets this year, the hurdle rate for investing in equities has increased. There is now a reasonable alternative return available in bonds and cash. We continue to expect a relatively ‘flat and fat’ market environment. The outlook for earnings will be crucial because higher real interest rates are likely to constrain valuations.”

Morgan Stanley: “Bear markets are like a Hall of Mirrors, designed to confuse investors and take their money. Trust YOUR fundamental process. For us, margins/earnings are likely to significantly disappoint whether there is a recession, or not. We double down on that view today... Our base case S&P 500 EPS forecast for 2023is $195, but we are increasingly eyeing our bear case of $180 based on these aforementioned dynamics.”

BTIG: “Our view remains that this is a counter-trend rally, but the next two weeks should be more telling as to the true duration of this move.”

By Senad Karaahmetovic

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