Profit ratio

Investors eye inflation report as bear market rally falters

The stock market may attempt to regain its footing in the coming sessions, although a new inflation report looms at the end of the week.

Stocks struggled to gain momentum last week. With Friday’s sell-off, the major indices were on track to end the four-day period with losses. This was disappointing for investors looking for a rally similar to the week before Memorial Day in which the S&P 500 gained around 6.5%.

Liz Ann Sonders, chief investment strategist for Charles Schwab, said the market surge in late May was likely the setup for more selling.

“The kind of rally we saw last week and some of what was in it seems a bit more typical of bear market rallies,” she said. “I still think you’re likely to get some countertrend pops in some of the more speculative areas of the market. … But I very definitely think poor quality trading is in the rearview mirror. in this environment, you need to be value-driven.Not the value indices, but the valuation.

While the S&P 500 briefly dipped into a bear market on May 20, it did not close 20% lower from its peak. However, Sonders said the current situation is the equivalent of a bear market, based on the sharp declines in individual stocks.

Sonders doesn’t yet see any signs that stocks could rise, although she says there is room for sharper rallies.

“I don’t think the sentiment environment is bearish enough yet,” she said. She said sentiment and behavioral measures need to show the extremes.

Peak inflation?

In the coming week, the economic calendar is relatively light. The Consumer Price Index and Consumer Sentiment – ​​both released on Friday – are the most important reports.

May’s CPI is expected to be slightly cooler than April, and economists expect it to confirm that inflation has peaked. Art Hogan, chief market strategist at National Securities, said headline year-over-year inflation is expected to come in at 8.2%, just below April’s 8.3% pace. .

“If the CPI hits or nears consensus, I think investors might feel better,” he said. Hogan said the market breakout at the end of May helped sentiment, even as stocks retreated last week. “Investors are in a more constructive situation, and this may continue if the CPI is near consensus or better,” he said.

Headline inflation, including food and energy, was 8.5% in March, and the hope is that the CPI will fall to half that level by the end of the month. year, Hogan said.

Diane Swonk, chief economist at Grant Thornton, said the CPI would be affected by the spike in gasoline prices in May. Used car prices and the cost of food could also be factors, she added.

“Everyone is hoping for this spike in inflation, but maybe it’s more elusive and less spike than people would like,” Swonk said.

Schwab’s Sonders said the market could worry in the short term about whether inflation has peaked.

“But it’s not just about whether we’re at the top. It’s how fast we come down from that top and ultimately how low,” she said. “Is the [Federal Reserve] on a mission to bring inflation back below the 2% target? Or will they feel comfortable with a level of 3%. … For me, where does the plane land? Is the runway at a higher elevation than it was before the pandemic?”

Earnings Warnings

Although there are few earnings reports in the week ahead, Hogan said companies may follow Microsoft’s lead and issue warnings. Microsoft lowered its revenue forecast, citing an unfavorable currency effect. Salesforce also lowered its revenue forecast due to the currency.

“Investors are at least looking at that. At least it’s not a demand issue. They’re focusing on the rising dollar and what that might do to multinationals,” he said.

Campbell Soup and Brown-Forman, the maker of Jack Daniel’s, announced their quarterly results on Wednesday. Signet Jewelers and DocuSign release their results Thursday.

Sonders said the weakening outlook for earnings and profit margins could trigger another decline for the market.

“We’ve had a valuation reassessment due to market weakness, but we haven’t seen the weakness in the earnings outlook yet,” she said.

Sonders said market rallies need to show better magnitude, meaning a high percentage of stocks are climbing together, before it starts to turn.

Another sign she is watching is the put/call ratio, which should be at a higher level to reflect more pessimism. This ratio is used as a contrarian indicator. It is a measure of the number of put to call options. Put options are betting that stock prices are falling and a high number would suggest very negative sentiment in the market.

Calendar for the coming week

Monday

Earnings: Gitlab, Coupa software

Tuesday

Earnings: United Natural Foods, JM Smucker, Cracker Barrel, Verint Systems, Casey’s General Stores

8:30 a.m. International Trade

3:00 p.m. Consumer credit

Wednesday

Earnings: Campbell Soup, Brown-Forman, Vera Bradley, Ollie’s Bargain Outlet, Five Below

10:00 a.m. Wholesale trade

Thursday

Earnings: Signet Jewelers, Nio, Vail Resorts, Rent the Runway, DocuSign, Stitch Fix

8:30 a.m. First unemployment registrations

Friday

8:30 CPI

10:00 a.m. Consumer Sentiment

2:00 p.m. Federal budget