Stock traders refrain from big bets after rally

Stock traders refrained from making big bets in the final day of July as concern about an overheated market resurfaced amid a rally that drove the S&P 500 to its longest streak of monthly gains since August 2021.

Wall Street has looked past concern about an earnings recession as data bolstered hopes on a soft landing despite the Federal Reserve’s rate increases. While many investors are betting the great tech rally that drove this year’s advance in equities has staying power, there’s a growing view the sector is due for a breather – which could weigh on the broader market.

To Matt Maley at Miller Tabak, investors need to be careful about extrapolating what we’ve seen this year in stocks, and it’s essential to have a backup plan for when the “FOMO rally” fades or “some compelling cracks” start to form. He’s among those betting broad equity averages will see limited upside over the next couple of months.

“Is merely ‘avoiding a recession’ really enough to push the stock market a lot higher from its expensive level?” said Maley. “Investors need to be careful about trying to squeeze every last penny out of this rally in the stock market over the coming days and weeks given that many of the best stocks are quite expensive.”

The S&P 500 edged higher to around 4,590, hovering near a 16-month high. The megacap space also saw subdued action, with Apple and Amazon.com due to report earnings in the coming days. The Nasdaq 100 notched its longest streak of monthly gains since August 2020. Treasury 10-year yields traded close to 3.95% while the dollar was little changed.

Traders took a Fed survey of lending officers in stride. As hinted by Chair Jerome Powell, the central bank said financial institutions reported tighter standards and continued weak demand for loans in the second quarter, extending a trend that began before recent stresses in the banking sector emerged.

The stock market has been seasonally more muted in August, but if history is any guide, the S&P 500 could see more gains after a five-month winning run. In the prior 37 such streaks since 1928, the gauge extended gains into a sixth month almost 80% of the time, according to Bespoke Investment Group.

Signs are beginning to point to capitulation among bearish institutional investors, economists and Wall Street strategists as market returns and economic data continue to defy expectations, said Mark Hackett, chief of investment research at Nationwide.

Citigroup’s Scott Chronert has joined the list of prognosticators who have revisited their gloomy outlooks in recent weeks. He raised his 2023 year-end call for the U.S. stock gauge to 4,600 and to 5,000 by mid-2024.

“The near-term hurdles we envisioned headed into Q3 are now behind,” Chronert wrote in a note to clients. “The new targets reflect increased probability of a soft landing in our scenario approach.”

Morgan Stanley’s Michael Wilson, one of the few Wall Street strategists to see last year’s equities rout coming, has been among the market’s leading pessimists throughout 2023. But on Monday, after months of soaring stocks, he changed his tone and now sees the rally running further.

Nationwide’s Hackett reckons that while earnings picture has been mixed, the challenges companies have endured – stubborn inflation, weak markets, and sluggishness internationally – are no longer head winds.

“Now, we’re not only seeing tail winds heading into 2024, but we’re getting less disruptive reactions in the stock market following earnings reports. These are very encouraging signs that a lot of the emotion that was driving markets has subsided,” Hackett added.

Indeed, U.S. firms beating profit estimates hasn’t been as impressive a feat as it once was. Companies whose earnings outpaced analysts’ expectations for the second quarter are still underperforming the S&P 500 Index by the most in 18 years on the day after results, according to Goldman Sachs strategists led by David Kostin.

“With lackluster earnings ‘beats’ mostly below historical averages, any breakaway from this sideways market will require additional fuel,” said Robert Teeter at Silvercrest Asset Management.

In corporate news, Exxon Mobil climbed as Bloomberg News reported it’s in talks with Tesla, Ford and other automakers about supplying them with lithium. SoFi Technologies surged 20% as the online bank raised its revenue guidance, citing benefits from deposit growth and lower funding costs on loans. Yellow, which hauls about 15% of major companies’ so-called less-than-truckload shipments, soared after ceasing operations and told union leaders that it plans to file for bankruptcy following years of financial struggles.

Traders also waded through the latest remarks from central bank officials.

Fed Bank of Chicago President Austan Goolsbee said Monday that data showing slower inflation is “fabulous news,” but he hasn’t yet decided on whether to support pausing rate hikes at the next policy meeting. Over the weekend, his Minneapolis counterpart Neel Kashkari said the inflation outlook is “quite positive,” though the central bank’s aggressive monetary tightening campaign will likely result in some job losses and slower growth.

Elsewhere, the yen dropped after the Bank of Japan announced an unscheduled bond-purchase operation to tamp down rates after adjusting policy on Friday to allow benchmark yields to climb as high as 1%. The purchases are another reminder that Japan’s slow retreat from ultraloose monetary policy brings a heightened risk of volatility.