Market Forecast For the Week of October 23, 2023: The Bears Prematurely Spill The Wine As The Market Finds A Bottom This Week

FORECAST: The S&P 500 tests 4200 early in the week as the narrative temporarily shifts bearish before rallying back to 4300 on positive earnings reports. Fears of slowing growth and widening war have floundered the bulls but will soon abate as robust data on US growth keeps the bulls in play until October draws to a close. From there expect a bullish rally to 4600 unless the geopolitical situation worsens or the US government suffers another credit downgrade.

The bullish case rests on a forecast of no landing in the US economy, despite a torrid pace of rate increases by the Fed and bond vigilantes. While the bears lampoon this notion it’s unlikely any data emerges to disprove it until 2024. As Bidenomics pushes more money into the economy while GOP fiscal hawks comically demand spending cuts to all but budget-busting entitlement programs the stage is set for fiscally-driven growth up through the 2024 election. That will drive employment and in turn consumption, keeping earnings estimates robust.

But accompanying growth will be inflation, keeping rates high and leading to a longer-term political crisis as interest payments crowd out not just discretionary spending but private investment as well. The negative implications of the macro picture suggest lower valuations that mimic the pre-GFC norm of 16-17 times earnings. Even if top-down analyst estimates for 2024 earnings come in as expected at $246 that equates to an S&P 500 capped at 4200 and as low as 3900. But the course of profit and macroeconomic data to date suggests the bears won’t be able to substantiate the macro case for such valuations until 2024. If the megacaps hit earnings estimates this coming week then 4200 will be a likely floor in this Autumnal correction and set us up for a foolish and unseemly but exuberant Santa Claus rally in November.

My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.