Market Forecast For the Week of February 5, 2024: The Market Races Straight Into The Fed’s Crosshairs

FORECAST: The S&P 500 rises to 4990 as the melt-up continues on the hoary logic that a rising equity market lifts all boats, leading to better macroeconomic dynamics that redound to higher profits and tax revenues and a permanently higher plateau for stocks. Valuations keep rising beyond the highs set during the zero-interest rate years but the bulls see the market growing into these valuations as both rising profits and tax revenues lower interest rates on government and high yield debt. Put another way, the bulls say today’s goldilocks economy will be nothing compared to tomorrow’s.

The strong earnings of the megacaps last week substantiate the bullish thesis insofar as the top tier of industry goes. For the rest of the economy the bulls exhort the skeptics to be patient. China is doubling down on the wealth effect by stimulating its financial markets, and this may help put a floor on global growth. Productivity has risen and may keep rising, while inflation has been declining and may keep declining. The decline in earnings estimates afflicting most industries outside big tech doesn’t phase the bulls, nor does the geopolitical horrorshow playing out across Eurasia. But should disinflation turn out to be disinformation due to the strong labor market and the consumer’s desire to spend away their worries, then a key girder of the bulls’ foundation quickly rots. The Fed is hinting this may be in the works, and if so the melt-up will give way to a sizable correction once we breach the 5000 mark.

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.