Market Forecast For the Week of January 23, 2023: Microsoft Can Blow Up The Equity Market And The Bulls Are Prepped While The Bears Are Fearful

FORECAST: The S&P 500 heads up to resistance at 4000 and stalls as investors await Microsoft’s earnings call Tuesday evening. Should guidance be mild the market rallies past its long-term bearish trendline and the bear market rally enters a blowoff period. But should MSFT sound notes of concern expect the bears to retake control and send the index back to the 3800 level and eventually lower to a retest of the October lows.

The bulls believe that services inflation will moderate as consumers slowly pull back and interest-rate sensitive sectors start laying off workers. The conundrum for these bulls is that it takes many months of data to confirm such a trend, and the spectre of an inflation mindset has historically taken time to break. The 1970s saw periods of disinflation that turned out to be cyclical because the consumer didn’t expect price stability to happen soon. With millions of workers no longer working and burnout afflicting many who still are working, the likelihood is that consumption of services continues apace until unemployment begins rising significantly and no one is hiring anymore. Microsoft can confound that bearish view by describing a resilient enterprise and consumer sector and resilient profit margins as disinflation creates the proverbial goldilocks economy.

But this is fairy tale reasoning, since rising services prices were evidenced last week with United Airline’s potent earnings call. The consumer is clearly not done yet with experiences even if they are satiated with goods purchases. Both doves and hawks on the Fed have made clear the only way to guarantee a moderating consumer and consequent disinflation is to keep rates restrictive for a long time, which bodes ill for a continued equity rally at current valuations. Expect Microsoft to heed the Fed more closely than the equity market of late, and to send a message that valuations are stretched too thin.

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