Market Forecast For the Week of July 17, 2023: The Bulls Get One Last Kiss Before They Go

FORECAST: The S&P 500 grinds higher toward 4600 as investors continue to dump 2023 into the irrelevance pile and focus their optimism on 2024. With the bulk of large cap firms reporting earnings in the final week of the month the bulls will feel free to take the market higher in anticipation of earnings beats, but will be sorely disappointed by both results and guidance as the month closes. The coincidence of a Fed rate hike and corporate worries about future results will send the market correcting hard, wiping out the melt-up and setting the stage for another volatile transition to Autumn.

The bulls’ pristine dichotomy between 2023 and 2024 mirrors the pandemic-era behavior of throwing 2020 into the trash heap and taking revenge in 2021 as long as there was money in the bank. Of the top 100 stocks I track 19 had lowered estimates last week while only 10 saw increases. This negative trend has accelerated since the spring, as analysts take down 2023 numbers with every bit of current news. Simultaneously estimates for 2024 have risen to an average growth rate of over 12%. The balance of this is back-end loaded, as the bulls try to showcase their prudence.

The entire logic of this bullish case rests on overturning historical precedents regarding the Fed and the bond market. All major Fed tightening cycles have resulted in recessions while all inverted yield curve manifestations have predicted recessions since 1970. The bulls are predicting that the Fed’s rapid pace of rate hikes and concommitant balance sheet reduction will have the same neutral impact as in the early 1990s, while the yield curve’s year-long inversion will be as nugatory as that seen in 1966. These were two different eras, characterized by different fiscal policies and inflation pressures. The most likely scenario remains that the economy contracts while liquidity declines, a double whammy for both earnings and valuations. Expect the melt-up to enjoy its last hurrah this week.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.