Market Forecast For the Week of May 20, 2024: The Bulls Splurge Into Summer And Bet On Quantity Over Quality

FORECAST: The S&P 500 rallies to 5360 as the bulls feast on liquidity while prophesying profit margin expansion in a goldilocks America. Only the Fed can undercut the bullish spirit as investors anticipate positive guidance from Nvidia, and this likely won’t happen until new data gives the Fed ammunition to cool the party down just as summer gets underway.

The bulls need to forecast expanding margins rather than admit that too much money is chasing too few stocks since nominal growth is clearly slowing and interest rates remain anchored in the 4% region. Without margin expansion market multiples would collapse since earnings growth would barely surpass the risk-free rate while at the same time the equity risk premium hovers just above zero. But the bulls are overestimating earnings growth by ignoring the clear deterioration in earnings quality that manifests the growing inequality and poor mood among the people. Since earnings season is months away and Nvidia is unlikely to disappoint, the bulls couldn’t care less about quality and spin fairy tales about America’s economic horizons with reckless abandon.

Only a drop in liquidity can shake the bulls at this point, and commodity markets are disclosing that liquidity is strong and coming from Asia more than anywhere. Rising leverage rather than rising margins will power equities to new highs in the meantime, fostering strong consumption and continued deterioration in savings among all but equity investors. That will keep inflation above target and force the Fed’s hand just as temperatures both real and metaphorical rise to a boiling point.

My current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), a moderate position in UPRO and a similar position in SPXU, which nets out to a neutral position in equities.