Market Forecast For the Week of February 12, 2024: Artificial Optimism Drives The Melt-Up Yet Higher

FORECAST: The S&P 500 continues melting up to 5075 before volatility returns and the market churns in anticipation of Nvidia’s earnings report on February 21. From that point I expect a final melt-up followed by a major correction as irrational exuberance dissipates and hard political realities set in.

Foreign investors are buoying US equities as confidence in the US economy stretches ahead of the rest of the developed world and most of the underdeveloped world. China’s stimulus has yet to convince investors that robust growth targets will be met, while Europe remains both economically and politically fragile under the threat of a second Trump term. Since Trump would bring tax cuts the fiscal picture would actually boost growth compared with a second Biden term, so global investors see the US as the winner in the confidence rankings.

But exuberance has turned irrational as numerous negative factors have been laughed away by the bulls. The rise in oil prices anticipates the broadening of geopolitical problems, a factor that should raise the equity risk premium. Instead the premium is at historical lows as interest rates ratchet higher in bizarre harmony with equity valuations. Protectionist fiscal policies typically worsen productivity and inflation, yet the bulls are betting on the opposite happening. And metals markets are revealing low global growth which can only drag on US exports, while a strong US labor market and high equity valuations mean imports will continue rising. The stage is set for a dramatic turn in market confidence once speculation on AI trends necessarily ebbs with the Nvidia earnings report.

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.