Market Forecast For the Week of June 20, 2023: The Market Melts Up Toward Its Narcissistic Finale

FORECAST: The S&P 500 melts-up yet higher and rallies to 4480 before the bulls deplete their ebullience and the bears force a consolidation. While melt-ups are hard to predict two factors are building to trip up the bulls; namely index rebalancing and corporate earnings due in the next few weeks. The rally has a natural ceiling at the old high of 4800 and likely burns out short of that and before the month is out. And as in all melt-ups, the come down will be vicious.

Most absurd among the bullish arguments is the irrelevance of 2023 earnings and the bright prospects for 2024. Earnings have been poor since last Autumn but the quality of those earnings even worse, yet the bulls claim the earnings recession is behind us and double digit growth lies ahead. But corporate guidance has been meek, the costs of AI investment significant and the slowdown in both employment and consumption obvious. The bulls offer no substantive argument for earnings growth and have confidence in nothing except the all-important fact that they have been winning for 8 months.

Even in the unlikely event that earnings quality no longer predicts future earnings the remaining headwinds are too profound to warrant abnormally high valuations. And in the equally unlikely event that 2024 estimates turn out to be correct the S&P still trades a steep premium to those estimates, while interest rates are now higher than at any point in 15 years. Restrictive interest rate policy will soon marry the Fed’s unqualified return of liquidity draining in the form of QT, unless another banking crisis emerges first. In both cases the declining velocity of money changing hands will deprive the bulls of their sole fuel source and reset valuations back towards the October lows.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.