Inflation Report Remains Key Catalyst for S&P 500 Investors This Week
06 June 2022 - 8:34AM
Finscreener.org
The equity markets struggled to
stage a comeback in the past week as investors remain worried about
macro-economic challenges impacting the fundamentals of companies.
Most equity indices experienced a decline on Friday, closing a
shortened four-day week with losses. In the week prior to Memorial
Day, the S&P 500 surged by 6.5%.
In an interview with CNBC, the
chief investment strategist at Charles Schwab, Liz Ann Sonders
stated the late May surge in the stock market sets up the bourses
for more selling going forward. According to Sonders, “The type of
rally like we saw last week and some of what it contained looks a
little more typical of bear market rallies.”
She added, “I still think you’re
likely to get countertrend pops in some of the more speculative
areas of the market. ... But I think very decidedly the low quality
trade is in the rearview mirror. I think to do well in this
environment you have to be value minded. Not value indexes, but
valuation minded.”
The S&P 500 index slipped
into bear market territory briefly last month during intra-day
trading but is yet to close a session with a 20% decline from
all-time highs.
Inflation is the key catalyst for stock
prices
In the upcoming week, investors
will be closely watching reports for the consumer price index and
consumer sentiment, both of which are set to release on Friday. The
CPI for May is forecast to be better than April with several
experts believing inflation to have already peaked. The CPI reading
for April stood at 8.3% with the number for May is forecast at
8.2%.
In May, the CPI will be impacted
by higher energy prices as well as food costs and red hot used car
prices. Even if inflation in May is lower than the numbers in
April, prices will have to decelerate quickly from their peak for
the equity markets to stabilize.
Technical traders expect the
S&P 500 to hold support at 4,073 and then at 3,810. The
S&P 500 Index slumped by 1.2% last week to close trading at
4,108.
Most companies are wrestling with
headwinds related to rising prices as well as higher interest
rates. Throw in factors that include geo-political tensions, supply
chain disruptions, and higher commodity prices and you can see why
stocks have been volatile in 2022.
Elon Musk, the CEO of
Tesla (NASDAQ: TSLA)
reportedly told executives that he has a “super bad feeling” about
the economy which might lead to a 10% cut in the company’s
workforce. TSLA stock fell 9% on June 3 and is currently trading
43% below all-time highs.
Microsoft and Salesforce lowered revenue
guidance
In the last week, tech
heavyweights such as Microsoft (NASDAQ:
MSFT) and
Salesforce (NYSE:
CRM)
lowered their revenue
guidance for the current
fiscal year due to a strong U.S. dollar. In case earnings and
profit margin estimates remain bleak, investors should brace for
another round of sell-off in the following months.
Sonders further explained, “We
had the valuation re-rating by virtue of the weakness in the
market, but we haven’t yet seen the weakness in forward
expectations in earnings.”
Another metric that Sanders is
watching is the put/call ratio which is used as a contrarian
indicator. It measures the number of put-to-call options.
Basically, put options expect stock prices to decline and a high
ratio indicates a bearish market sentiment.
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