Market comment 2023

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But there are perhaps four important reasons why bulls should hold their ground.
First, the technical. The S&P 500 has just moved back above its 50-day moving average, which is supportive, while even after the decent run it’s 14-day relative strength index, a momentum gauge, is trending up but at 56 sits well below overbought territory.

Next, and alluding to easing angst in the fixed income arena, Fundstrat’s Tom Lee notes that the equity rally, which followed the European Central Bank’s decision to deliver a ‘dovish hike,’ bodes well for when the Fed also signals it is done tightening. The ECB’s move “and the market’s reaction is a harbinger of the 1982 moment ahead for the S&P 500…the key takeaway is equities went to an all-time high 17 trading days after Volcker publicly considered ‘ending the inflation war’,” says Lee.

There’s another fundamental microeconomic reason encouraging bulls: company profits. As John Butters, senior earnings analyst at FactSet notes, earnings forecasts have been improving over recent months and now the S&P 500’s aggregate third quarter earnings per share are expected to rise 0.5%.

“If 0.5% is the actual growth rate for the quarter, it will mark the first quarter of (year-over-year) earnings growth reported by the index since Q3 2022,” says Butters in his latest note.

Finally, among the most important prerequisites for a sustained bull run is firepower. It can mean that when new highs are made there’s still sufficient cash to support the trend. So, consider the chart below from Stephen Suttmeier, technical research strategist at Bank of America. It shows the amount held in money market funds has hit a fresh record of $5.625 trillion .

“Investors love cash,” he says, but at 5% cash lags the year-to-date return for the S&P 500 of about 17%. “Since the SPX can continue thrive after solid returns for 1H and YTD through August, it would not surprise us to see investors put cash to work and fuel a rally into year end,” Suttmeier concludes.

There are 5.6 trillion reasons that stocks can enjoy a year-end rally - MarketWatch