S&P 500 finds long-term support, awaits more Powell comments, PCE inflation later in the week
- The S&P 500 lost 1.4% in the past week.
- Fed Chair Jerome Powell said two further rate hikes were likely in 2023.
- The market is focused on May PCE data out Friday that will signal US inflation’s direction.
- Nike releases fiscal fourth-quarter earnings in Thursday’s post-market.
The S&P 500 is losing 0.17% about two hours into the first trading session of the week, as markets tread waters ahead of busier days. The week will get more eventful as the days go by, with Federal Reserve Chair Jerome Powell expected to participate in a central-banker panel in Sintra, Portugal on Wednesday, and US Core Personal Consumption Expenditures (PCE) inflation data coming out on Friday.
The S&P 500 index declined 1.4% in the week ending June 23. The index has lost ground in four out of five of the last sessions, and the performance has lent credibility to the view that the S&P 500 is in for a midsummer downturn. The index gained for five straight weeks previously and had penetrated the overbought region of the Relative Strength Index (RSI), so it is somewhat unsurprising that a pullback would emerge.
Last week Fed Chair Jerome Powell reiterated his belief in front of Congress that the central bank will enforce two further rate hikes this year. The announcement was a repetition of his remarks back on June 14, but it sent the market ducking for cover. The message was accented by rate hikes from the central banks of England, Switzerland, Norway and Turkey. These hikes in conjunction, resurrected the storyline of a slowing global economy in the second half of the year.
Wall Street is expected to largely drift this week until Friday, when the US government’s Bureau of Economic Analysis (BEA) releases its PCE inflation survey for May. The Fed’s favorite inflation gauge will give investors a better idea of what to expect from the US central bank’s next FOMC decision on July 26. On the corporate side, one significant event for the week will be Nike (NKE) earnings on Thursday. The global, upmarket brand is viewed as a decent proxy for consumer spending, so expect other consumer cyclicals to trade directionally with Nike’s results.
S&P 500 News: May PCE, Michigan Consumer Sentiment Index lead data-heavy Friday
On Friday, the Bureau of Economic Analysis, an agency within the US Department of Commerce, will release the PCE inflation data for May. The PCE is relevant since it offers up more specialized insights into the state of inflation and is treated more seriously than the Consumer Price Index (CPI) by Fed governors who decide interest rates. To compare the two to ‘90s punk rock lore, the PCE represents the true punks of Rancid, while the CPI is a stand-in for the poseurs of Blink-182.
That said, early June’s CPI update witnessed a collapse from April’s 4.9% YoY headline to May’s 4% figure. True to form, analysts have not allowed the CPI data to sway them. The current forecast for core PCE inflation in May is 4.7% – the same as in April. Likewise, core May MoM PCE inflation is expected once again at 0.4%. A significant beat on either figure should lead to a rally on Friday, while higher inflation results will provide further fodder for a sell-off.
The Michigan Consumer Sentiment Index, released 90 minutes after the PCE on Friday, could aid the market. The preliminary reading of 63.9 roundly walloped the forecast for 60. Once again analysts are holding consensus at 63.9, a quite positive reading for consumer sentiment that has improved in the first half of the year.
The BEA will also release Personal Spending for May, which analysts believe will arrive at a subdued 0.2% MoM. The previous reading was 0.8% on a monthly basis.
Nike earnings has its fans and its detractors
With much of the earnings calendar out of the way, the entire spotlight is on Nike, which will release fiscal Q4 earnings for the quarter ending in May on Thursday after the market close. Wall Street consensus predicts that GAAP earnings per share (EPS) of $0.68 will follow revenue of $12.59 billion.
There is no unanimity, however, on this quarter. Six analysts have raised their guidance on Nike in the past 90 days, while five have lowered their outlook. Nike’s share price will likely move according to guidance rather than earnings results though. Wells Fargo estimates that the resumption of student debt payments will cause US consumer spending to drop by $6 billion in September and thereafter. UBS analysts predict this will hurt clothing brands like Nike, in addition to Crocs (CROX), Foot Locker (FL) and Victoria’s Secret (VSCO).
It is difficult to say how much an earnings beat will matter since consensus already points to a 32% decline from the last Q4’s $1 in EPS. If earnings meets consensus, this will still be the fourth consecutive quarter that Nike has seen per share profits fall.
S&P 500 FAQs
What is the S&P 500?
The S&P 500 is a widely followed stock price index which measures the performance of 500 publicly owned companies, and is seen as a broad measure of the US stock market. Each company’s influence on the computation of the index is weighted based on market capitalization. This is calculated by multiplying the number of publicly traded shares of the company by the share price. The S&P 500 index has achieved impressive returns – $1.00 invested in 1970 would have yielded a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.
How are companies chosen to be included in the S&P 500?
Companies are selected by committee, unlike some other indexes where they are included based on set rules. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be greater than or equal to $12.7 billion. Other criteria include liquidity, domicile, public float, sector, financial viability, length of time publicly traded, and representation of the industries in the economy of the United States. The nine largest companies in the index account for 27.8% of the market capitalization of the index.
How can I trade the S&P 500?
There are a number of ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFD) to place bets on the direction of the price. In addition, that can buy into Index, Mutual and Exchange Traded Funds (ETF) that track the price of the S&P 500. The most liquid of the ETFs is State Street Corporation’s SPY. The Chicago Mercantile Exchange (CME) offers futures contracts in the index and the Chicago Board of Options (CMOE) offers options as well as ETFs, inverse ETFs and leveraged ETFs.
What factors drive the S&P 500?
Many different factors drive the S&P 500 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500 as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Earnings of the week
Monday, June 26 – Carnival (CCL)
Tuesday, June 27 – Walgreens Boots Alliance (WBA)
Wednesday, June 28 – Micron (MU), General Mills (GIS)
Thursday, June 29 – Nike (NKE), Paychex (PAYX), McCormick & Co. (MKC), Rite Aid (RAD)
Friday, June 30 – Constellation Brands (STZ)
What they said about the S&P 500 – David Bailin
David Bailin, Chief Investment Officer at Citi Global Wealth Investments, says the US economy is experiencing major pullbacks in some sectors while others flourish – a phenomenon he calls a “rolling recession”.
“Clearly commercial real estate is in recession […] some of our manufacturing, basic consumer manufacturing is in recession right now.”
S&P 500 forecast
Last week’s pronounced pullback, which actually began on June 16, demonstrates a clear move toward taking profits. Just since March 13, the S&P 500 has moved from 3,835 to above 4,400. To many institutional investors, the market appears a bit pricey at a time when economic data is quite mixed, interest rates are expected to remain stubbornly high, and Russia experienced a surprising weekend coup threat.
The market looks aimed for the 4,325 level that worked as resistance back in August 2022. Already having broken below the 9-day moving average, a better point of support may be 4,300. This is where the 21-day moving average is approaching.
A break below 4,300 would mean a more serious pullback is in order. The index might then head to 4,200, where it found resistance in both February and May. The Moving Average Convergence Divergence (MACD) is poised for a crossover based on Friday’s close, so it would be unusual if traders did not position themselves for the possibility of a more severe downtrend.
S&P 500 daily chart