Market Forecast For the Week of August 22, 2022: One Last Gasp For The Bulls Before The Bears Take Over And Fill In The Gaps

FORECAST: The S&P 500 consolidates early this week then moves higher to challenge last week’s highs just above 4300. As August draws to a close so does the bear market rally, as the bulls lose patience with the impossible dream of taking the market back to its all-time highs. Following a retest of the 4300 level expect the bear market to resume with full force, taking the markets beyond the lows set in June.

The chief reason for the massive head fake rally since the June lows is confidence in profit margins and a shallow recession or soft landing for America and the broader global economy. To that end Wall Street analysts have actually started increasing estimates for select firms, positing earnings growth of 1% this year and a robust 9.5% next year for the top 100 firms in the S&P 500. That means that profit margins have held up against higher costs and disruptions this year and are expected to recover next year despite the slowdown the Fed is engineering for both the American economy and the globe. The extreme optimism needed to adduce such a view is apparent when one considers the dropoff in the American housing market and the precipitous fall in Chinese property markets, which join with high energy prices and low labor force participation to choke profit margins and sales. Why analysts would be so optimistic is more likely the inertia of accepting a dramatically different macro environment than a reasoned analysis of the ability of CEOs to manage corporate earnings.

The growth in sales volume is the chief variable that can give CEOs room to manage earnings and that depends largely on consumer confidence and the value of the $US. American CEOs have the problem of low consumer confidence but the benefit of a strong $US that keeps import prices relatively contained. But as the Ukraine war drags on into a hot standstill and political developments promote tariffs and other barriers to trade, I see the strong $US hurting the global economy and leading to downgrades in sales estimates and in turn profit margins. That will crush the optimism of the bulls and return us to the bear market that we need to reset valuations to a sustainable level.

Last week I exited my remaining position in Titan Machinery (TITN) , so my current positions are a moderate but relatively large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the levered ETFs UPRO and SPXU.