Market Forecast For the Week of September 11, 2023: A Benign Future Of Productivity Is Something Only Santa Can Bring, But The Bulls Are Betting On It

FORECAST: The S&P 500 broadens out with higher highs and lower lows as the bulls try getting through September within striking distance of the August highs at 4600. Barring a geopolitical calamity by October the table is set for a 4th quarter rally that peaks with a retest of the all-time highs as Santa makes his way south. Recent experience exposes the jejune nature of this scenario but the bulls effectively believe the spate of awfulness since 2020 portends a mean reversion back to normalcy and its complimentary financial analogue, the raging bull market. With substantial cash on the sidelines and available from jittery overseas investors the bulls have the balance sheet to let the good times roll.

The bulls argue that geopolitics can turn positive since the all-important US-China relationship has reversed poles, with America now acting as the stimulator of last resort keeping the global economy from getting unhinged. Just as China once stimulated to save itself and everyone else from dire pessimism during the GFC, now Biden and the GOP are stimulating the keep the US consumer spending while Europe, China and Japan moulder and meander. But what followed China’s rare episode as global savior was robust global growth helped by high but manageable debt ratios that corporations could deal with by becoming ever more efficient at digitization & automation. By contrast global debt levels today are much higher and so are interest rates to service those debts, forcing the bulls to bet on ever grander technological leaps to keep productivity apace and profit margins from sagging.

Hopes abound that AI will make the computer revolution, internet revolution and automation revolution look like minor league play. But the difference today is not just that high debt loads make the whole gambit much riskier, but that the very founders of AI are warning of grave consequences from getting it wrong, with some arguing for a pullback altogether. The future of AI looks more precarious than benign but until 3rd quarter earnings validate the bearish argument that productivity is slowing with rising debt, the bulls can feast on exuberance at the cost of logic.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.