Market Bear Trap?
The stock market is facing a pullback as the Federal Reserve prepares to keep its monetary policy tight to curb inflation pressures. The pullback comes after the stock market saw a rally earlier this year, but with the Nasdaq 100 approaching bull-market territory, it is now overbought. The recent rally is being questioned whether it was a “bear trap” or if it was driven by “fear of missing out”. With concerns over the US’s 200% tariff on Russian-made aluminum and Washington shooting down an alleged surveillance balloon from China, the market has become more bearish.
The S&P 500 reflects better-than-expected economic growth and a drop in bond yields, according to Goldman Sachs Group Inc. strategists, however, high valuations, lackluster earnings, and elevated interest rates mean the rally is expected to slow down. The tight labor market and reduced pricing power are causing pressure on profit margins, and companies will struggle to pass on rising costs to consumers, according to Bank of America Corp. strategists.
A slate of Fed speakers this week, including Chair Jerome Powell, will help shape the views on interest rate outlooks. The Fed funds futures show a 25 basis-point hike in March and a 75% chance of another hike in May, with the odds of a June hike rising to 28%. With the path for further monetary tightening, bond investors expect US inflation to ebb. The five-year and ten-year breakeven rates, proxies for inflation expectations, have fallen, while the Nasdaq 100 and 10-year Treasury yields are diverging, which is a negative signal for the index.
Cantor Fitzgerald remains bearish on equities and says there has been a dramatic change in sentiment and positioning that is more bullish. This creates a tailwind for a bearish view, but the outlook for earnings, the Fed, and multiples remains unchanged.
Looking at the Macro picture, with a tight labor market, declining inflation, lackluster earnings, and elevated interest rates, the stock market faces challenges and a potential bear trap. As Fed Chair Powell speaks this week, investors will be paying attention to see if the dovish tone from last Wednesday’s meetings stays or if he has changed his mind on his outlook with a more hardened approach to rates. It remains to be seen how the market will react, but investors should be prepared volatility ahead, one way or another. Maybe a hedge would be a good play?