Market Forecast For the Week of September 25, 2023: The Bears Go Too Far And The Bulls Gladly Dip In

FORECAST: The S&P 500 falls to 4300 but then sharply rebounds as the bulls draw hope from the action across the commodity complex and fixed income markets. The global economy looks to have stabilized with chances of an upside surprise, resulting in higher commodities and interest rates and attendant belief in continued consumption and top line growth. But underlying this fragile scenario is the negative impact of persistent inflation and restrictive real rates, which gives the bears reason to keep pressure on valuations Consequently the S&P eventually finds a ceiling around 4500 as the Autumn consolidation continues until earnings season catalyzes either the bulls or bears to set the direction heading into the Winter.

That direction would normally be positive as holiday optimism and the end of tax-loss selling buoys the bulls. But the pessimism currently weighing on markets will likely ebb and flow for a few more months unless earnings come in better than feared in October. So far analysts aren’t holding their breath: for the week ended Friday, there was no net change in estimates, as many stocks saw declining estimates that offset those with improving prospects. That combined with the forecasts of leading economic indicators and the yield curve suggest valuations have seen their peak. A rise in volatility back to the mean would further limit the upside, setting up a wild trading market but little progress through year-end.

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.