Market Forecast For the Week of July 10, 2023: The Bulls Race To The Top Before The Bad News Starts

FORECAST: The S&P 500 rallies past previous highs but hits a ceiling at 4480, retracing back to 4400 by week’s end as investors prepare for a stream of 2nd quarter earnings. The first taste of those earnings arrives with the major banks and these will prove ambiguous, unsettling investors into a state of growing queasiness. As tech earnings come out by month-end expect a full-blown correction that takes the index back to the midpoint of the bear market rally around 4000.

Fixed income, currency and commodity markets are painting a consistent picture of weak but persistent global growth, combined with persistent but slow disinflation that in turn necessitates higher for longer rates in Europe and America. But the risks veer to the downside because of the wildcard of central bank liquidity, which likely falls precipitously and can only be meaningfully offset by a declining dollar. Only the equity bulls believe this global context yields double-digit earnings growth through 2025, and then only after we get through flat growth in 2023. My analysis of first quarter earnings quality reveals that even flat growth in 2023 is optimistic. That means current valuations are only justifiable if 2024-2025 shows extraordinary growth, well above current levels of optimism.

The mood in the US and the awful geopolitical cross-currents across Eurasia tell me to expect a plethora of negative events that diminish corporate confidence and make earnings growth a pipe dream. First among these events will be 2nd quarter earnings, which I expect to underperform already low expectations and worse, coincide with dispiriting executive guidance. The bulls are running on fumes now and will soon give up the race.

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