Market Forecast For the Week of October 24, 2022: The Diamond In The S&P 500 Will Fade Quicker Than Cubic Zirconia

FORECAST: The S&P 500 makes a run toward 3800 as the bulls herald a seeming reversal pattern in the index founded on better than feared earnings guidance, a respite in the $US rally and stability in interest rates. Failing to breach resistance at 3800 the bulls take profits and send the index to the middle of its Autumn trading range as big tech earnings guidance and further data on global growth and inflation trickle out. By month-end the markets move to new lows as the resumption of a rally in the $US driven by falling bond prices resurrects fears of a catastrophic break in some corner of global Wall Street.

The markets rallied last week on optimism that the velocity of decline in global growth has stabilized most everywhere but China, leading both major and EM currencies to rally alongside copper & oil. Simultaneously earnings results and corporate guidance from banks and select cyclicals was more sanguine than for early reporters like FedEx and Nike, lending credence to forecasts of 9% earnings growth among large caps in 2023. Unfortunately for the bulls the conflicting trends of rising wage costs, real income declines and collapsing liquidity warrant further cuts in earnings estimates, making current valuations unsustainable unless the Fed pauses or pivots on its pace of QT or raising short-term interest rates. Even the dovish members of the Fed are wary of pivoting lest this boost the equity market and ramify into persistent consumer spending in the face of labor shortages. Consequently I expect the yield curve to move higher through the week along with inflation expectations, setting the stage for an eventual swoon in equities.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which nets out to a meaningful short position in equities.