The S&P 500 (^GSPC) has recovered all of its losses from the “Liberation Day” and has set the longest winning streak for the benchmark since 2004.
But now that the S&P 500 is up about 14% from its April 8 low, Wall Street strategists are not convinced that the index can continue to rise smoothly.
“For now, fundamental and macro concerns are being pushed back, but not alleviated,” Citi equity strategist Scott Chronert wrote in a note to clients.
As Chronert pointed out, there have been signs in recent weeks that the U.S. is close to reaching a trade deal, but no deal has actually been officially announced. This makes Trump’s tariff policy a constant variable in the investment landscape.
Another key concern is the risk of a recession. Although the April jobs report released on Friday showed that the U.S. labor market remains solid, other indicators continue to show that the employment environment is cooling. At the same time, a series of economic data have also been weaker than expected.
The multitude of unresolved issues has prompted strategists to repeat a familiar refrain over the past month: Things look good for now, but there are serious concerns about what’s next.
“While the market rebound is gratifying, it’s no reason to be complacent,” said David Kelly, chief global strategist at JPMorgan Asset Management. “Despite Friday’s jobs data, the economy is losing momentum and will likely fall into recession without real progress on trade or weak near-term fiscal stimulus. More importantly, if Washington’s policies lead to more trade barriers, less immigration, or even wider budget deficits over the long term, any recovery is likely to be anemic, with long-term real GDP growth sliding to well below 2%.”
Amid the stock rally, there have been some signs of strengthening fundamentals. With 72% of S&P 500 companies reporting for the first quarter, the index is expected to report year-over-year earnings growth of 12.8%, above the 7.2% analysts were expecting on March 31, according to FactSet data.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, wrote in a note to clients Monday that companies that beat earnings per share expectations saw their shares rise more than normal, suggesting that “earnings dynamics” and optimism about a U.S. trade deal played a role in the stock market’s rally.
“This (earnings) phenomenon does appear to have weakened somewhat since mid-April, suggesting that U.S. stocks may soon need another catalyst to keep the recovery going,” Calvasina wrote.
Mike Wilson, chief investment officer at Morgan Stanley, agreed with Calvasina, saying corporate earnings and trade talks have driven the S&P 500’s recent gains. But for the rally to continue and for the S&P 500 to head toward its all-time high near 6,100, Wilson believes that “a trade deal with China in the coming weeks is needed to bolster corporate confidence that the momentum of trade de-escalation will continue and supply chain disruptions will be limited.”
“While a deal with China that significantly reduces tariffs is critical to corporate sentiment/EPS revisions, the path of monetary policy is also an important variable for equity returns,” Wilson wrote. “Notably, our economists do not see the Fed cutting rates this year (i.e., it’s a tough sell).”
The Fed will announce its next monetary policy decision on Wednesday, followed by a press conference from Fed Chairman Jerome Powell at 2:30 p.m. ET. The consensus expectation is that the Fed will keep interest rates unchanged on Wednesday, and the market currently sees only a 28% chance of a rate cut at the June meeting, according to the CME FedWatch tool.
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