Market Forecast For the Week of February 6, 2023: Common Sense Will Replace Exuberant Optimism Faster Than AI Can Rewrite Business Models
FORECAST: The S&P 500 makes one last leap to test the 4200 area then corrects back to the bottom of its recent channel at 4000, as the bears mount yet another challenge to irrational exuberance. This time the market’s fate will hinge not on Fedspeak or CPI prints but on whether the $US rises and bond prices continue falling. I see this happening as key industrial commodities have turned lower while Friday’s payrolls report means services inflation is here to stay. The bulls have to reckon with American equity valuations higher than at any time during the QE era (other than momentary levels just before the plunge in 2020 and the large correction in early 2018), while the bears can point to declining earnings estimates from still-lofty levels. A return to sensibility begins by month-end with a new leg lower in the index, taking us to 3400 by Spring.
The currency and fixed income markets are critical to equities now because irrational exuberance has reached its limit and any flows out of equities will burst the bubble. At 4200 the market is trading at 17x expected 2024 earnings despite subpar earnings and revenue performance relative to analyst estimates in the latest quarter and a plethora of negative guidance. At current optimistic levels the market is forecasting 11% earnings growth in 2024, dismissing the inverted yield curve, quantitative tightening, a decreased labor force underpinning a raging labor market, high geopolitical tensions and a statist American President who overtly supports labor over capital and punitive interventions in everything from technology to hospitals to credit card fees to rock concerts. No margin expansion or surging revenues are possible in this context unless 2023 is the new 1995 because AI will make consumers hungry for more google searches and videos co-created by non-humans.
Even if “the age of AI is upon us” the fact is 11% earnings growth is above the average growth since the end of the GFC, when short-term interest rates were mostly zero and never rose above 2.5%. Today rates are at 4.5% and the Fed has said countless times these rates will go higher and stay higher for longer. Layoffs have begun across technology and manufacturing and will continue as high rates combined with elevated price levels from past inflation dampen American consumption and global growth simultaneously. That corporations will deal this on top of a smaller labor force, uncertain immigration, quiet quitting and government harassment from the left and right all because AI will write new software code is the manifestation of irrational exuberance at its limit. As happened in 1999 the party is almost over.
My current positions include a significant cash position, 3M (MMM), Pfizer (PFE) and the inverse levered ETF SPXU, which nets out to a significant short position.