A Rise In Recession Odds, Inflation, And Bank Stress Fail To Sway The Stock 

Wall Street stock analysts are halted in their tracks: they haven't updated their S&P 500 forecasts in three months, the longest run since 2005. Economic news that used to jolt traders has recently been tamed. And, while profits are their typical wild card, there is an argument to be made that enough pessimism is built in to mitigate their influence.

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"This market is confounding the bears by refusing to fall and retest as many people predict." "But, I'm not necessarily a big bull since the market is trading at a reasonably high multiple," said Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. "I don't see the market significantly breaking to the upside, but I also don't see the market selling down."

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According to statistics, an unusual calm has remained in stocks for the majority of the year, keeping the S&P 500 in its smallest trading range since the first half of 2017.

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The S&P 500 has gone seven days without a 1% move as of Wednesday's closing, the longest streak since November.

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All of this comes at the outset of an earnings season that Wall Street expects to be difficult. According to Trade Algo, first-quarter profits in the S&P 500 are expected to tumble nearly 8% from a year ago, the largest drop since the beginning of 2020. Add to it the fact that markets have risen considerably since the last round of reports, and the stage is set for earth-shattering disappointment.

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At the same time, equities investors have had plenty of opportunities to panic over weakening earnings sentiment, but they have so far refrained. As recently as three months ago, analysts predicted a 1% drop in first-quarter earnings, and the projection has worsened ever since – a remarkably rapid pace of revisions over a single quarter. Is the threshold now low enough for corporate reports to arrive quietly? Slimmon at Morgan Stanley says yes.

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"You don't want your company to have high expectations coming into earnings season," he added. "I believe the situation for stocks is excellent."

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The FeThe ramifications of the failures of Silicon Valley Bank, Silvergate Capital Corp., and Signature Bank are still being played out in the market. As a result, investors are exposed to comments regarding future credit and lending norms that are pessimistic. But, Slimmon stated on Wednesday that the lenders are unlikely to divulge anything. JPMorgan Chief Executive Officer Jamie Dimon stated on Friday that "there will be a little tightening." There is no credit crunch."

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Federal Reserve's emergency steps relieved stress in the sector. Banks borrowed a total of $164.8 billion from two backup facilities last month, including a record $152.9 billion through the discount window, but borrowings have subsequently decreased.

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Global liquidity flows "have been kind to equities over the last month, which acts as a mechanism to keep stock prices up," said Eric Johnston, Cantor Fitzgerald's head of equity derivatives and cross-asset. He stated it's difficult to predict when the impact will wear off.

The debt ceiling, according to Johnston, might be a spark. Since January, the Treasury Department has used a variety of accounting tricks to extend its borrowing ability under the statutory debt limit.

This involves depleting the Fed's cash reserves and lowering its supply of Treasury bills, which should increase liquidity in the banking sector. When Congress lifts or suspends the limit, the Treasury will issue more bills to swiftly replenish its cash cushion, which drains liquidity — a "negative for risk assets" that would likely send equities lower, according to Johnston.

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Analysts who are looking for price activity may find it hard to wait for Congress to act. Lotfi Karoui, Goldman Sachs' top credit strategist, believes the debt ceiling problem will not be resolved until late July or early August.

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There's also the question of whether companies have the potential to move the S&P 500. The benchmark is presently trading at roughly 19 times projected profits, while its top ten companies — large tech names like Apple Inc., Microsoft Corp., and Amazon.com Inc. — are trading at nearly 28 times estimated earnings on average.

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Because of their high multiples, the mega caps may struggle to provide meaningfully increased earnings. As a result, first-quarter data may have little impact on the index in the coming weeks.

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"For the market to have a lot of upsides, profits would have to rise." And I don't believe that will be the case," Slimmon remarked.

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Outside of results, economic data may tell investors about overall mood, but little of it is the "top-tier data" that often drives markets, according to Ben Jeffery of BMO Capital Markets. Even highly predicted statistics haven't performed well recently. The S&P has moved less than 0.5% up or down from where it started the day on three of the last four releases of Consumer Price Index data.

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If earnings and economic statistics fail to shift the needle, the Fed may have to intervene. Markets are pricing in a 25 basis point increase in May at a rate of more than 80%. According to Que Nguyen, a chief investment officer of equities strategies at Research Affiliates, more rate rises and additional comments on inflation combat "would force markets to break to the downside."

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Not many markets have been as placid as the stock market. This month, the ICE BofA MOVE Index, a frequently monitored indicator of Treasury volatility, reached its highest level since 2008. Bitcoin has gained almost 80% year so far, benefiting from the banking upheaval, while oil has risen the most in a year following an unexpected production reduction.

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Equities have felt the same influences, but none of them have jolted the S&P 500 out of its rut. Unless anything dramatic happens, the benchmark index may likely continue its downward trend for the remainder of the month.

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"Wait and see all you need is time," remarked Karoui of Goldman Sachs. 

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