The Worst Isn't Behind Us, It Lies Straight Ahead

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Josh Schafer of CNBC report the S&P 500 finishes week at highest level since August, as Nasdaq logs 7th-straight winning week: 

Stocks rose on Friday as investors digested a pairing between two of the largest American automakers and prepared for the Federal Reserve's next decision on rate hikes.

The S&P 500 rose 0.12% while the Nasdaq Composite increased 0.16% and the Dow Jones Industrial Average added 0.13% or 44 points.

The Nasdaq has risen for seven straight weeks while the S&P 500 is at its highest levels since August 2022.

The S&P 500 finished Thursday's trading sessions up more than 20% from its October 2022 lows, officially marking the start of a bull market. The stock rally to start 2023 comes as strong economic data continues to outweigh incessant recession fears.

"I do believe that the worst is behind us," BMO Capital Markets Chief Investment Strategist Brian Belski, who recently boosted his S&P year-end price target from 4,300 to 4,550, told Yahoo Finance Live. "The Fed, maybe, has one more interest rate increase between now and the end of the year, and that's OK, but I think most of that has been already priced into the market."

Shares of Tesla (TSLA) and General Motors (GM) both traded higher at the market open after GM announced Thursday it is joining forces with Tesla to leverage the electric-vehicle maker's Supercharger Network. The announcement comes two weeks after Ford (F) announced a similar partnership with Tesla to enable access for Ford vehicles to Tesla's charging network.

Shares of Docusign (DOCU) turned negative as the company beat analyst estimates for both revenue and earnings per share in the most recent quarter. Several Wall Street analysts reiterated sell ratings on the stock.

"DocuSign attributed the out-performance to renewal timing, only passed a portion of the 1Q beat to the full year guide and sounded somber about the state of the demand backdrop," UBS analyst Karl Keirstead wrote in a note to clients after the earnings release.

Meanwhile, Netflix (NFLX) stock gained 2.6% on Friday after new data from analytics platform Antenna showed US sign-ups for the streaming service jumped by the most in at least four and a half years following the streamer's password sharing crackdown launching last month.

On the economic front, Friday is expected to be quiet. Markets projecting the Fed's next move are currently pricing in a 78% chance the Federal Reserve pauses its interest rate hike cycle at its meeting next week.

"The FOMC is likely to pause at its June meeting next week to let the haze clear before it considers another rate hike," a Goldman Sachs team of economists led by Jan Hatzius wrote in a note to clients Thursday night.

The economists added: "The Fed leadership has signaled that it sees pausing as the prudent course because uncertainty about both the lagged effects of the rate hikes it has already delivered and the impact of tighter bank credit increases the risk of accidentally overtightening."

Hakyung Kim and Sarah Min of CNBC also report the S&P 500 notches fourth straight positive week, touches highest level since August:

The S&P 500 rose slightly Friday, touching the 4,300 level for the first time since August 2022 as investors looked ahead to upcoming inflation data and the Federal Reserve’s latest policy announcement.

The broad-market index gained 0.11%, closing at 4,298.86. The Nasdaq Composite rose 0.16% to end at 13,259.14. The Dow Jones Industrial Average traded up 43.17 points, or 0.13%, closing at 33,876.78. It was the 30-stock Dow’s fourth consecutive positive day.

For the week, the S&P 500 was up 0.39%. This was the broad-market index’s fourth straight winning week — a feat it last accomplished in August. The Nasdaq was up about 0.14%, posting its seventh straight winning week — its first streak of that length since November 2019. The Dow advanced 0.34%.

Investors were encouraged by signs that a broader swath of stocks, including small-cap equities, was participating in the recent rally. The Russell 2000was down slightly on the day, but notched a weekly gain of 1.9%.

“It’s the first time in a while where investors seem to be feeling a greater sense of certainty. And we think that’s been a turning point from what had been more of a bearish cautious sentiment,” said Greg Bassuk, CEO at AXS Investments.

“We think that as we walk through these next few weeks, that will be increasingly clear that the economy is more resilient than folks have given it credit for the last six months,” said Scott Ladner, chief investment officer at Horizon Investments. “That will sort of dawn on people that small-caps and cyclicals probably have a reasonable shot to play catch up.”

The market is also looking toward next week’s consumer price index numbers and the Federal Open Market Committee meeting. Markets are currently anticipating a more than 71% probability the central bank will pause on rate hikes at the June meeting, according to the CME FedWatch Tool.

More from CNBC:

Tesla shares on pace to match longest winning streak

Tesla’s stock is on track to match its longest winning streak of 11 straight positive days, should it end the day positive Friday.

The last time the stock sustained as long of a consecutive rally in January 2021. The stock was up about 4% as of Friday afternoon. 

Corporate profits expected down 6.4% in Q2

Corporate earnings for the S&P 500 are expected to post a third consecutive decline in the second quarter, according to an estimate Friday from FactSet.

Profits are projected to decline 6.4% from a year ago during the April-through-June period. That would be the biggest drop since the pandemic-scarred second quarter of 2020 and worse than the 2.1% decrease from the first quarter.

On March 31, FactSet was expecting a 4.8% drop for the quarter. Since then, 66 companies have issued negative earnings guidance while 44 have issued a positive outlook.

FactSet’s John Butters said the firm expects earnings to turn around in the second half of the year, increasing 0.8% in the third quarter and a robust 8.2% to close the year.

Market bears are ‘capitulating,’ Wolfe Research says

The bulls clearly have the upper hand in this market, Wolfe Research’s Rob Ginsberg wrote.

“The bears are capitulating,” he wrote. “Persistently negative since early ’22, the bulls exploded this week to levels last seen in late ’21, right around the market’s peak. Add into the mix the collapse in the VIX, explosion in IWM call volumes and a drop in put/call ratios, and it’s evident that complacency is rapidly building.”

S&P 500 could go to as high as 5,000 by next year, Bank of America says

Bank of America technical strategist Stephen Suttmeier said a rebound in the Farrell Sentiment indicator could mean even more gains for the stock market going forward. More specifically, he noted the jump “favors SPX 4750 to 5000 in 1H 2024.”

Suttmeier said that the indicator — which tracks the 10-week average of investor sentiment, as gauged by the AAII survey — has recovered from its lowest levels since the savings and loan crisis that ran from the 1980s through the 1990s.

“Last year’s lows for Farrell Sentiment coincided with the June and October lows on the S&P 500 (SPX). These lows preceded bullish signals for Farrell Sentiment on moves above the oversold threshold of 0.5 on 2/17 and as of 6/8,” Suttmeier said. “The SPX tends to have strong returns from four weeks to two years after Farrell Sentiment moves above 0.5. The average and median 52-week SPX returns for these signals near 16.3%-16.7% do not rule out SPX 4750 into February 2024 and SPX 5000 into June 2024.”

It's Friday and everyone is turning cautiously bullish.

Earlier today I read that Wall Street economists are increasingly less worried about a 2023 recession:

The much-discussed recession of 2023 still isn't here, and economists are becoming less confident it will come at all.

This week, Wells Fargo's team of economists became the latest group to dial back its recession outlook. The firm now sees a recession hitting at the beginning of 2024 as recent economic data reveals an economy "not yet on the brink of recession."

"While we still expect the delayed effects of monetary tightening and tighter credit availability to dampen economic growth, the economy has proven to be more resilient than we anticipated," Wells Fargo's team of economists wrote in a note to clients on Wednesday. "As a result, we have pushed back our expectations for the start of economic contraction to Q1-2024."

Wells Fargo isn't the only one becoming more optimistic about the outlook for economic expansion in 2023. Goldman Sachs cut its odds of a recession this year from 35% down to 25% earlier this week. Capital Economics teased in a Wednesday note it plans to push back its third-quarter recession call. Bank of America chief Economist Michael Gapen explained to Yahoo Finance Live there's an increasing path to a "soft landing," or a mild recession. There's even a case for no recession per what Goldman Sachs COO John Waldron told Bloomberg earlier this week. 

The positive outlooks follow economic data that economists often refer to as "resilient." The US labor market added 339,000 jobs in May, the largest monthly increase since January. April job openings surprised to the upside too. All while consumers continue to spend despite sticky inflation.

As of Thursday, the Atlanta Fed is projecting the US economy will grow 2.2% in the second quarter, which would mark the fourth straight quarter of gross domestic product expansion. Typically, two consecutive quarters of GDP declines would be considered an official recession mark.

"We now suspect that the economy is unlikely to fall into recession as soon as the third quarter, as we had previously anticipated, and that it will take longer for a meaningful downturn in the labor market to materialize," Capital Economics wrote on Wednesday.

he recession debate comes as Wall Street wonders how the economy will react to the Federal Reserve's most aggressive interest rate hike campaign in 40 years. The economy could come down from the interest rate hikes with a 'hard landing', where the Fed induces a deep recession and unemployment jumps significantly, or a soft landing, where the US economy only slows down slightly.

Gapen notes that the "mild recession" he and BofA are projecting is in line with the description of a soft landing. The odds of this have increased overall over the last several weeks as credit fallout from the Silicon Valley Bank collapse seems to have moderated and the debt ceiling debate in Washington has been resolved.

"Unless bank stress gets worse and a credit crunch is revealed, it's harder to see where that hard landing risk is coming from at present," Gapen told Yahoo Finance Live.

There are still bearish calls on the economy out there. Morgan Stanley sees corporate earnings dropping 16% by the end of the year while analysis from Bespoke Investment Group showed investors haven't bet this heavily on a drop in the S&P 500 since 2007.

But the stock market is considered a forward-looking indicator, and the Nasdaq is rallying over 26% this year while the S&P 500 is nearly in a bull market. So if a hard-hitting recession is still coming in 2023, markets aren't pricing it in.

Indeed, the stock market is considered a forward-looking indicator, but sometimes even the stock market has it wrong.

Here is what I wrote on LinkedIn:
The end of the bear market? A mild recession? It must be good news Friday on Yahoo Finance and while many economists are pushing back their recession call, they still don’t get it. The commercial real estate crisis is far from over, all those non performing loans regional and big banks carry on their books will come to the fore by Q4 this year and that’s when we’ll have a major credit crisis. Moreover, the Fed and other central banks are still tightening as economies slow which is a recipe for disaster, it will ensure a deep and prolonged global recession. So these economists are all missing the icebergs we are about to hit,

So, whether or not the Fed pauses next week (I doubt it), it doesn't matter, the damage is done as central banks all over the world raise rates in a slowing economy.

I suspect by Q4 of this year, we will see a meaningful selloff in the stock market which will accelerate in the first half of next year. 

In fact, the team at Bank of America thinks the bull market in stocks could disappear as investors get whacked by even higher interest rates and higher unemployment from the Fed's inflation fight:

The bull market in stocks could get slammed back down, as the Federal Reserve's inflation fight will raise interest rates even higher and spark higher unemployment in the economy, Bank of America said.

"Fed ain't done with hikes… we stick with 'sell the last rate hike' call," a team of strategists led by Michael Hartnett said in a note on Friday, pointing to headwinds as the central bank raises interest rates to fight inflation. 

Fed officials could end up raising interest rates to 6% within the next 12 months, strategists predicted, lifting the Fed funds rate another 75-100 basis points above its current range. That's largely because the central bank remains focused on its goal of bringing inflation back down to 2%, with officials warning that rates could stay elevated through the end of the year.

Getting inflation below 3% could also bring a 4% or higher unemployment rate, as higher rates tighten financial conditions and weaken the labor market. 

"We remain bearish; still think biggest 'pain trade' next 12 months Fed funds 6% not 3%," strategists added, suggesting that investors were too bullish on the current rally in stocks that's seen the S&P 500 rise 20% from its low in October. 

Inflation has remained well-above the Fed's 2% target for the past year, and clocked in at 4.9% in the April Consumer Price Index report. Core inflation measured 5.5%, a sign that inflation is still running hot in the economy. 

Meanwhile, rates are at their highest level since 2007, which threatens to overtighten the economy and tip it into a recession. The bank estimated there's a 25% chance that US could enter a recession in the next year, and a 70% chance the economy will enter a slowdown without a full-blown recession.

That comes as investors are growing more enthusiastic about stocks, with the S&P 500 up 13% from the start of the year and officially entering a bull market this week. The movement is partly driven by lower inflation expectations, as well as expectations that the Fed could pause rate hikes this month.

And at least one economist agrees with me on a nasty recession ahead.

Theron Mohamed of Business Insider writes that David Rosenberg warns the bull market in stocks won't last long - and there's a 99% chance of a US recession:

The stock market's powerful rally is unfounded, and the US economy is virtually guaranteed to sink into recession, David Rosenberg has warned.

The S&P 500 officially entered a bull market on Thursday, as it notched a 20% gain from its October lows. Meanwhile, unemployment data released the same day showed initial jobless claims rose to 261,000 last week, the highest level since October 2021.

"This market continues to be nothing more than a short-term momentum play," the veteran economist and Rosenberg Research president said in a morning note.

Rosenberg underscored the disconnect between the stock-market milestone and softening labor market. He questioned whether current equity valuations are justified given the darkening economic backdrop.

"You can believe the press headlines or you can believe the leading indicators — which suggest that we do indeed have a 99.15% chance of an official NBER-defined recession," he said. "And if that is the case, then it is the first time in recorded history that a fundamental bear market ended before the downturn even arrived."

Rosenberg suggested that aggressive federal spending last year may have pushed back the recession. He described the fiscal support as "the Energizer Bunny gift that just kept on giving."

Moreover, the former chief North American economist at Merrill Lynch underlined the immense optimism priced into stocks. He noted the S&P 500's forward price-to-earnings multiple is 25% above its long-term average, and the index is heavily concentrated, as it was during the dot-com bubble.

He also pointed to low volatility expectations as evidence of deep complacency among investors, and cautioned that sentiment is "quickly hitting uber-bullish levels as FOMO stages a resurrection."

Rosenberg has been sounding the alarm for several months. In late April, he predicted a recession by September, a 20% plunge in the S&P 500, and a credit crunch as banking fears strangled lending. He also told Insider in February that house prices could tumble by 15%-20%.

Numerous market commentators have warned that asset prices will fall and the economy will contract. They've pointed to the Federal Reserve hiking interest rates from nearly zero to upwards of 5% since last spring, which has encouraged saving and made borrowing far more costly.

Higher rates help to combat inflation, but they're typically bad news for consumer spending, debt-reliant industries such as commercial real estate, and riskier assets such as stocks.

Lastly, some tweets to make you think about all the nonsense you're reading out there about a mild recession and new bull market:

Below, Tom Lee, Fundstrat Global Advisors co-founder, joins 'Closing Bell' to discuss the tech rally ushering in a new bull market, this week's market moves, and international market concentration.

And earlier this week, Stanley Druckenmiller, Chairman & CEO, Duquesne Family Office spoke with Bloomberg’s Sonali Basak at Bloomberg Invest New York 2023. 

“There’s a lot of stuff under the hood when you go from this kind of environment, the biggest broadest asset bubble ever, and then you jack interest rates up 500 basis points in a year, I think the probability is that Silicon Valley Bank, Bed Bath & Beyond, they’re probably the tip of the iceberg,” he said.

Take the time to listen to Druckenmiller, he gets it. 

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