Market Forecast For the Week of February 27, 2023: More Consolidation Ahead As Vapid Exuberance Resists Outraged Skepticism

FORECAST: The S&P 500 declines down to the 3900 region then violently rebounds back to 4050 as the bulls regain confidence in the American, European and Eurasian consumer. Buttressed by a paucity of blockbuster data and earnings reports this week, the bulls reiterate jejune arguments that rebounding consumer confidence and a strong jobs market mean no recession in the US, with theoretically positive consequences for corporate earnings. But this marks the last hurrah for the bulls as key economic data released in mid-March will confirm that disinflation remains a challenge due to high employment and service sector growth, girding the Fed hawks to push interest rates higher and send equity valuations lower.

Exuberant multiples have persisted despite the logic that stressed-out consumers must eventually react to higher interest rates and persistent inflation by spending less, to the detriment of 2023-2024 corporate earnings. Bad inflation data come mid-month will hammer that realization in but adding to the downside risk is the possibility that Eurasian economic growth fails to gather momentum and dooms European exporters, leaving the US as an island of economic strength. Recent lows in zinc, tin and aluminum point to weaker than expected Chinese demand and mirror the negative action in gold and copper due to rising interest rates and a surging dollar. Should confidence in Xi Jinping falter as the US threatens profound decoupling then not only will earnings estimates crash to earth but so too will investor confidence in the future of globalization.

Expect these risks to marry with worries about declining global liquidity and overleveraged shadow banks (e.g., Credit Suisse) to drive equities back to the October lows by Spring. From there a double bottom could ensue should nothing break financially and the quality of earnings rise among early reporters. Without that upgrade in earnings quality expect new bear market lows as the summer doldrums make their inevitable return.

My current positions include a large cash position, 3M (MMM), Pfizer (PFE) and a significant short-term bullish position in UPRO.