The stock market has been on a rollercoaster ride in recent weeks, with significant fluctuations reflecting both optimism and caution among investors. The S&P 500 index, a key benchmark of U.S. equities, has been particularly volatile. After rising 8% from 5,235 on May 30 to a record high of 5,667 on July 16, it subsequently declined by 8% through August 5. Since then, the index has rebounded by 3%, reaching 5,343 as of the most recent trading sessions. Despite these ups and downs, the S&P 500 remains up 12% year-to-date, underscoring the resilience of the market amid ongoing economic uncertainty.
The factors driving this volatility are multifaceted. On the positive side, investors have been buoyed by expectations that the Federal Reserve may soon cut interest rates, coupled with optimism about corporate earnings and the broader economy’s resilience. These factors have contributed to a general uplift in equity prices, as lower interest rates tend to make stocks more attractive relative to bonds, and strong corporate earnings signal healthy business conditions.
However, the market’s recent decline has also highlighted underlying concerns. Investors are worried about the potential for a significant economic slowdown, especially given the disappointing earnings reports from some of the mega-cap technology companies. These companies, which include the so-called “Magnificent Seven” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), failed to meet analysts’ high expectations for the second quarter, leading to a pullback in their stock prices. Additionally, the initial frenzy over artificial intelligence (AI) has cooled somewhat, as investors reassess the near-term impact of AI on corporate profitability.
The current state of the market has led to a sharp divide between bullish and bearish investors. Bulls argue that despite the recent correction, the market still has strong fundamentals. JoAnne Feeney, a portfolio manager at Advisors Capital Management, believes that the recent declines in the Nasdaq Composite (down 10.2%) and the S&P 500 (down 5.7%) since their mid-July peaks are not cause for alarm. She points out that such corrections are common and that the underlying earnings power of many companies remains strong. Feeney is particularly encouraged by the earnings outlook for the non-tech sectors of the S&P 500, noting that the other 493 companies in the index are expected to post earnings growth of 7.4% for the second quarter. This would mark their first quarterly profit growth in six quarters, providing a positive signal for equity investors.
On the other hand, some market observers, like Scott Rubner of Goldman Sachs, see the recent market correction as a potential buying opportunity. Rubner notes that the worst of the equity supply and demand mismatch for August may be nearing its end, and he anticipates a favorable window for snapping up equities between August 30 and September 6. He describes the current market correction as being in the “eighth inning” of a nine-inning game, suggesting that the bottom may be in sight. Rubner, who has been bearish on the global macro environment, is turning tactically bullish on equities, believing that the recent dumping of stocks by systematic macro strategies (often driven by hedge fund algorithms) is close to running its course.
Despite the mixed signals, there is a cautious optimism that the market can weather the current turbulence. Goldman Sachs has raised its estimate of the probability of a recession in the next 12 months to 25%, up from 15%, due to signs of economic weakness. However, the firm still sees recession risks as limited, citing overall positive economic data, the absence of major financial imbalances, and the Federal Reserve’s significant room to cut interest rates if necessary to support the economy.
In summary, the stock market remains in a state of flux, with both positive and negative forces at play. Investors are grappling with the potential for a soft landing versus the risk of a more severe economic downturn. While some see the current environment as a buying opportunity, others remain cautious, awaiting clearer signals about the direction of the economy and corporate earnings.