The June Market Expectations Table substantially indicates that the stock market's comeback from the May 20 lows has been fueled by real improvements in the two most critical factors influencing this market: Chinese lockdowns and Fed rate hike expectations. While the gain has been justified, the Table also shows that the S&P 500 is fully priced for the current environment at these levels, implying that equities will need more good news to continue rallying.
The MET reflected the improvement in China (lockdowns loosened, Covid cases reduced) as well as the growing hope that the Fed will "pause" its rate hiking attack somewhere in the fall, implying that the Fed will not hike as much as markets had expected.
The advances in stocks over the last two weeks have been mostly driven by these two causes.
The remaining market variables, such as inflation, the Russia/Ukraine war, and economic growth, remained virtually constant from last month, and whether they will improve (helping to continue the rally) or deteriorate (causing another retreat) is unclear. Looking more closely, it's still uncertain if inflation has truly peaked, if a near-term ceasefire in the Russia/Ukraine conflict can be achieved, and if economic data slows considerably or just moderates, resulting in an economic "soft landing" that the bulls and the Fed require.
Finally, you'll see that we're using projected S&P 500 EPS for this month's MET, and the multiple range for each scenario (Current, Gets Better If, Gets Worse If) has been reduced by one full digit. This is to reflect the fact that we are utilizing earnings forecasts that are further out in time, as well as the increasing uncertainty surrounding expected earnings for the S&P 500 in 2023. The increase in predicted EPS (from $225 to $240-ish) nearly negated the one-point fall in the multiple range, so the total impact on future market movement is minor.
S&P 500 Multiple Levels
Despite significant changes to the input values in this month's Market Expectations Table update, the final target values for the current, better-if, and worst-if scenarios were only marginally different from May, as lower multiple levels were offset by a switch from 2022 S&P 500 EPS expectations to 2023, which are significantly higher. The S&P 500 started the week trading in the midpoint of the current situation target range, about 12% below the better-if target and 13% above the worst-case scenario. The continued, wide spread between the different scenario price goals (which is more than 1,000 points in the S&P 500); as a result, I've kept the MET Chart's "zoom" at the weekly time period.
Current Situation: In June, the current situation target was updated to the upside, with predicted S&P 500 EPS of $240/share in 2023, up from $225/share in 2022, and the market multiple range was cut from 18X-19X to 17X-18X.
The target range is 4,080 to 4,320, with a midpoint of 4,200 (approximately 1% higher than where the market started the week). On the charts, the S&P 500's midpoint of the current situation range is closely matched with key resistance at the early June highs just shy of 4,200, which also corresponds to the late-February/early-March lows that preceded the "bull trap" rise into April. Further to the upside, secondary resistance will be found above 4,300, the upper bound of the current scenario range, where markets failed to stabilize until late April and the S&P 500 rolled over to fresh 52-week lows. To the downside, the current situation's lower bound near 4,080 has provided S&P 500 support so far this month and should be considered initial support.
Things Get Better If Scenario: In June, the "better-if" scenario witnessed the biggest change of the three, and it was to the positive, as the market multiple range was decreased from 19X-20X to 18X-19X, but this was more than compensated by a significant increase from the prior.
The latest S&P 500 EPS projection for 2023 is $249/share, up from $227/share in 2022. This updated data gives a target range of 4,482 to 4,731, with a midpoint of 4,607 (up from 4,426), which is roughly 11% higher than where the S&P 500 started the week.
Looking at the charts, the better-if scenario range's midpoint of 4,607 is very close to the Q2 highs, where the aforementioned "bull trap" rally peaked and then reversed. As a result, if the S&P 500 is able to make a run towards all-time highs, the 4,600 area will offer technical resistance. The 4,731 top bound of the better-if range was a crucial resistance mark until the end of 2021, when the S&P failed to break through it for six weeks in a row. The market also paused there after volatility spiked in mid-January, increasing its likely technical significance in the unlikely event that stocks make a massive run higher in the next weeks or months.
Things Get Worse If Scenario: The "worse-if" scenario range declined this month as the multiple range was lowered by another full point from 16X-17X to 15X-16X, but this was somewhat offset by an increase to $230 per share for S&P 500 EPS in 2023, up from $215 per share in 2022. The latest figures show a worst-case target range of 3,450-3,680, with a midpoint of 3,565 (up from 3,548 in May), more than 14% below where the S&P 500 began the week.
Technically, the S&P 500 has not traded down to the worst-case target range since the first few days of 2021; however, there was a decent stretch of market consolidation in late 2020 in the area of the upper level of the worst-case range (3,680), and any decline towards that area, and beyond towards the midpoint of 3,565, should entice dip-buyers given current fundamentals.
The stock market's price action was particularly heavy in May, and the stock market's trajectory has turned from neutral to negative since late April, when the neckline of the head-and-shoulders pattern that had been building since the middle of last year was broken. The measured move objective for that signal is 3,545, which is only 20 points away from the worst-case range's midpoint. As a result of its technical and fundamental significance, it will be a well followed downside target.
The lower end of the present situation target range (4,080) will provide initial support for the S&P 500, but look for secondary support in the May pivot area between 3,890 and 3,970. Look for the market to defend the May low near 3,810 if selling picks up significantly.
Feel free to reach out to me and use me as a sounding board.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President