S&P 500 Sees 1% Rise as Buyers Prompt Stock Recovery: Market Overview

A Sturdy Rebound: An English Perspective on Market Movements

A Welcome Market Rally

Ah, the fickle nature of the stock market! A wave of dip buying has rejuvenated stocks after an alarming selloff driven by economic worries. Traders are now keenly anticipating this week’s inflation data. These numbers could provide clues about the Federal Reserve’s next move regarding rate cuts.

Winds of Change in the Major Indices

All major groups within the S&P 500 have advanced, exhibiting around a 1% increase. Approximately 90% of its shares saw an uptick. It’s quite the comeback after the gauge experienced its worst start to a September since 1953, as noted by Bespoke Investment Group. Tesla Inc. and Nvidia Corp. were at the forefront, while Apple Inc. lagged, all eyes on their Monday product launch. Meanwhile, the VIX — Wall Street’s favoured volatility gauge — dipped below 20.

Analysing the Technicals

"We’re observing mostly technical dip-buying," Tom Essaye from The Sevens Report said. "Economic growth is undoubtedly and clearly losing momentum, but a soft landing remains more likely than a hard landing. This week, the spotlight is back on inflation."

Treasury Moves and Economic Indicators

Treasuries had minor movements, with traders lowering the probability of a half-point rate reduction at the Fed’s September meeting to 20% from 50% last week. U.S. inflation expectations steadied, while delinquency concerns grew, according to a Fed Bank of New York survey.

Sentiment Amongst Equity Investors

“Equity investors are walking a sentiment tightrope between Fed rate cut cheer, recession fears, and a political wonderland,” remarked Craig Johnson from Piper Sandler. "Technical analysis suggests last week’s weakness was just a pullback within a longer-term uptrend."

Short-Term Market Projections

RBC Capital Markets strategists have suggested that U.S. stocks could face further choppiness and declines in the near term due to seasonality, sentiment, and election risks. Lori Calvasina’s team wrote, "Any further damage would be contained within a 10% pullback range. If hard landing fears escalate, the risk of a growth scare decline in the 14%-20% range will also admittedly rise."

Insights from UBS and Principal Asset Management

Mark Haefele at UBS Global Wealth Management remains optimistic. "We expect S&P 500 companies to grow earnings by 11% this year and 8% in 2025," he said. A gleam of hope lies in historical data; without a U.S. recession, the index has gained about 17% on average 12 months after the first Fed rate cut of a cycle.

Seema Shah at Principal Asset Management pointed out, "Rate cuts have historically supported strong equity gains in 1985 and 1995 as recessions were avoided. However, in 2001 and 2007, even aggressive easing failed to prevent sharp market declines amid economic downturns."

Volatility and Investment Strategy

Higher volatility in the near term will enhance the appeal of utilities and other quality and income stocks over their growth counterparts, advised Savita Subramanian from Bank of America Corp. “Prefer the tortoise to the hare,” she penned, highlighting that utility returns have paralleled those of the Nasdaq over the long term.

Hedge Fund Activity

Hedge funds continued to unwind positions in U.S. stocks, with the S&P 500 experiencing its most significant weekly decline since March 2023. Globally, equities have been net sold for the eighth consecutive week, particularly in North America, as highlighted in Goldman Sachs Group Inc.’s prime brokerage desk report.

Future Projections and Fed’s Role

History may teach us much about the Fed’s influence on equities. According to Seema Shah, Fed’s successful navigation between soft and hard landings will greatly define U.S. equities’ trajectories. For instance, rate cuts in 1985 and 1995 spurred strong equity gains, whereas, in 2001 and 2007, economic downturns overshadowed rate cuts’ benefits. Investors need to heed the economic context amidst rate cuts.

Inflation Watch

Attention is now riveted on Wednesday when a government report is expected to reveal that the consumer price index rose by 2.6% in August compared to the previous year. This would mark the smallest increase since 2021. As it stands, there’s little new guidance from Fed officials due to a traditional blackout period ahead of the September 17-18 meeting.

Final Thoughts

“Slowdowns do not necessarily portend recessions, nor do stock market corrections presage bear markets,” noted Konstantinos Venetis from TS Lombard. Yet, the mix of increasing macro and political uncertainty places the burden of proof on the bulls in the near term.

The coming days will undoubtedly be a period of scrutiny as investors keep an eye on inflation figures and the Federal Reserve’s subsequent actions.

With assistance from Vildana Hajric.

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