Market Forecast For the Week of April 3, 2023: The Grind Continues On The Road To 4200, But The Bears Have Time On Their Side

FORECAST: The S&P 500 consolidates last week’s gains as the bears vainly try reversing the bullish trend toward resistance at 4200. This week’s economic and financial data won’t alter the macro picture and the bulls will successfully buy any dip to the 4000 level on jejune hopes for a goldilocks economy. Expect the index to roar back above 4100 by end of week and rally until earnings kick in mid-month, at which point the bears will possess a new argument to take the market lower as reports of declining earnings quality slake the bulls enthusiasm and set the stage for a Spring collapse back to the October lows.

Earnings quality has been declining for several quarters now but buy-side investors and sell-side analysts have yet to adjust earnings expectations to reflect this. Even more absurd is the belief that AI and labor dynamism will power productivity that drives double-digit after-tax earnings growth in 2024 and beyond. Not only is productivity on a downtrend but AI entails huge uncertainty and high costs that work against near-term earnings growth, not in favor of it. And with the GOP ideologically geared to debt-limit brinkmanship the risks are overwhelmingly negative. Not only will the economy and earnings likely decline because of the above, but if they don’t the Fed will be empowered to further reduce liquidity and return to QT after the surge in liquidity occasioned by the recent bank failures. The bulls are on borrowed time as the return of 5% short-term rates will destroy valuations even if nothing else conspires to do so.

On Friday I reduced my position in the levered ETF UPRO. Consequently my current positions include a still larger cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities.