The stock market is signaling that it is ready to continue to rise. Nevertheless, some major risks remain.
The S&P 500 fell 5.2% from its all-time high closing September 2 to its lowest close of the pullback on October 4. pressure on profit margins. Bond yields had also skyrocketed, with the Federal Reserve essentially confirming that it would cut back on bond purchases soon. Less money entering the bond market lowers bond prices and increases bond yields, making future corporate profits less valuable.
Now the stock market seems to have absorbed all of that and is climbing again The S&P 500 is up almost 4% from its recent low. At 4,468, the index is now trading above its 50-day moving average of 4,438, a key technical level that illustrates the index’s larger uptrend. If stocks behave well after breaking above this level, it shows that investors are convinced that paying the current price of stocks is worth the risk.
Market sentiment is increasingly buoyant. On Thursday, the S&P 500 recorded its biggest gain since March 5, according to Instinet. The percentage of stocks in the index that rose – 95% – was the highest since June 21. On Friday, the index climbed more than 0.5%, with around 90% of the components in the green, according to FactSet. A wide range of rising stocks indicates that market gains are not dependent on just a few stocks and that investors are gaining optimism about the health of the economy. Instinet sees a high probability that the index will reach 4.570 fairly quickly, for a gain of over 2%.
Two factors are behind the rebound. Profits exceeded estimates by a wider margin than most thought possible. Bond yields fell slightly.
Still, there are plenty of reasons why investors shouldn’t be too dizzy. Many companies have yet to report earnings, and the macroeconomic challenges associated with earnings still exist. Granted, the big banks, who don’t have to deal with supply chain limitations, drove much of the overall earnings result on the S&P 500; Financials beat earnings expectations by 21%, while all other sectors exceeded only 5%, according to Credit Suisse. The revenues of manufacturers of goods such as
Procter & Gamble
(PG) will therefore be an important indicator of the supply chain and the labor cost situation. On the other hand, another spike in bond yields is still possible, as long-term inflation expectations are still higher than the 10-year Treasury yield.
The S&P 500 is still below its all-time high. Next week could determine if the rebound is sustainable or just a fender-bender.
Write to Jacob Sonenshine at [email protected]