Market Forecast For the Week of January 22, 2024: Melting Up Before Inflation Sours The Mood

FORECAST: The S&P 500 rallies to 4910 on hopes that earnings reports validate belief in a long business cycle that extends across the decade as it did in the 2010s and 1990s, notwithstanding how those decades ended. Following the rally the market consolidates on fears that valuations can’t rise much higher unless interest rates decline, returning the focus to the Fed and its susceptibility to political pressure in this election year.

The positive guidance from Taiwan Semiconductor and the less positive guidance from Fastenal help substantiate the bullish earnings thesis outlined above. But with the equity risk premium at the bottom of its historical range the bet is clearly on declining interest rates over the next few years. While presently it’s fiscal spending and individual credit driving profits and margins across the economy the bulls hope the growing fascination with AI will take over and lead to both robust growth and more importantly efficiencies that reduce prices. That would give the Fed cover to heed political pressure and lower rates, leading to ever higher ERPs. So the bulls hope but with inflation stubbornly hanging out in the 3% area the risk is that 4900 represents a major top this week, setting up for a retest of last October’s lows.

I am effectively neutral on the market, as my current positions include 3M (MMM), Pfizer (PFE), and a small position in UPRO and a larger position in SPXU, which nets out to a neutral position in equities.