Market Forecast For the Week of July 24, 2023: The Bulls Smile And Grin All Around As The New Bubble Is The Same As The Old

FORECAST: The S&P 500 rises early in the week toward 4600 and then begins a correction as earnings increasingly come in under expectations. Ensues a move down to 4400 before another bull run toward the old highs of 2022. The bulls are firmly in control and can afford a correction before the dreaded autumn season arrives, and one brave attempt to make new all-time highs will mark the exhausting finale to this bizarre year of euphoria trumping reality.

The reality is earnings are declining and corporate guidance is cautious rather than ebullient. Estimates continue to decline for 2023 while they simultaneously rise for 2024. The underlying logic is the negative impact of monetary policy has already been felt and consequently a new upcycle in business and consumer confidence has emerged. This despite unemployment at record lows, a housing market that never cracked and a yield curve that has remained deeply inverted for over a year. The effect of both previous interest rate hikes and ongoing drainage of monetary liquidity can only work against housing and any sector dependent on leverage, leaving only a small elite positioned for the eventual rebound. But even these firms will fall as they did during 2022, when their earnings declined and revealed how cyclical they were.

As defaults among the weak rise so too will more refinancings fail and with that the straightforward transmission of monetary policy that drains demand across the economy. This logic is exactly what executives are cautioning about and the selloffs in Netflix and Tesla last week are a perfect prelude to what’s to come for the broader market in August. Expect this year’s edition of bullish euphoria to end like previous cycles with the bears triumphing in the Autumn.

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