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S&P 500’s $6 trillion rally shows signs of fatigue

The New York Stock Exchange on Wall Street is shown in New York.   (New York Times)
By Rita Nazareth Bloomberg

Stocks, bonds and the dollar barely budged after the Federal Reserve minutes reiterated the central bank’s cautious approach on interest rates, with traders gearing up for Nvidia Corp.’s results.

The S&P 500 edged lower after hitting “overbought” levels and the Nasdaq 100 underperformed.

As the earnings season winds down, questions on the sustainability of the advance led by the “Big Seven” group of megacaps have resurfaced, with Nvidia declining from a record.

The bar was set high for the world’s most-valuable chipmaker, whose shares have more than tripled this year – leaving little room for error.

Some $6 trillion in market capitalization has been added to the U.S. equity benchmark in 2023 in a rally fueled by the artificial intelligence boom, Corporate America’s resilience and bets the Fed will pivot to rate cuts next year.

The gains left the index about 5% away from reclaiming its all-time high.

For a market surge that has been predicated squarely on the belief the central bank has completed its hiking cycle and rate cuts are due in 2024, the Fed minutes just underscored the most-recent messaging – officials are still not prepared to declare victory and they have no intention so far to ease policy, according to Quincy Krosby at LPL Financial.

“Today’s sluggish market is a more a function of a short-term overbought market, rather than a market that believes it misinterpreted the Fed,” Krosby noted.

“Still, the market believes that the Fed is finished and that the economy will require help with rate cuts in 2024, regardless of the Fed’s messaging.”

“The stock market is once again priced for perfection,” said Matt Maley, chief market strategist at Miller Tabak + Co.

“Since the stock market is more ‘overbought’ right now - than it was ‘oversold’ three weeks ago – investors will need to remain very nimble as we move through the end of November and into December.”

Short-term charts on the S&P 500 are currently sporting a negative divergence between price action (approaching recent 2023 highs) and momentum (lower highs), according to Dan Wantrobski, at Janney Montgomery Scott.

“This is a sign that buying power is weakening even as the S&P looks to test into the low-4600 zone,” Wantrobski noted. “Markets are now vulnerable to profit taking/consolidation over the near-term. We also believe they are still vulnerable to elevated volatility/correction within the first half of 2024.”

Hedge funds are holding their most-concentrated wagers on U.S. equities than anytime in the past 22 years, according to data from Goldman Sachs Group Inc.

The most popular bets remain in megacap tech, with Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. in Goldman’s list of “Hedge Fund VIPs” this quarter.

To Savita Subramanian at Bank of America Corp., the S&P 500 is set for a fresh high in 2024 because U.S. companies have adapted to higher rates and weathered macroeconomic jolts.

She sees the gauge at a record 5,000 by the end of 2024, which is 10% higher than Monday’s close. Next year will be “a stock picker’s paradise,” they said.

U.S. stocks have “much more upside potential” as they approach decisive bullish breakouts, wrote BofA’s technical strategist Stephen Suttmeier.

If the S&P 500 could surpass the low 4,600s, it would confirm a “bullish cup and handle” pattern from early 2022 – triggering more gains, he added.

“Our base case is for further modest equity gains in 2024, with the S&P 500 Index ending the year around 4,700,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

“As inflation continues to fall and growth moderates, we are even more positive on quality fixed income. But an unusually wide range of risks could still spoil the outlook.”

For investors stashing record sums in cash, U.S. bond managers overseeing a combined $2.5 trillion have a bit of advice: It’s time to put that money to work.

That’s the message from Capital Group, DoubleLine Capital, Pacific Investment Management Co. and TCW Group.

Signs of ebbing inflation and softer growth have fueled a 3.6% surge in the Bloomberg U.S. Aggregate Index in November, leaving it with a return of about 0.7% for 2023.

That’s still well short of what cash has earned this year. But it shows what a real turning point could deliver after a year marked by head fakes over price pressures and Fed policy.

“If people are moving into cash because of 5% rates, we could see that money start trickling back into markets soon. Inflation is coming under control, and the bond market is now preparing for the Fed to start cutting rates in March,” said Callie Cox at eToro.