The Stock Market Drifts as Caution Reigns Before Jackson Hole

After a rally that propelled the market to its best week of 2024, stocks showed mixed movements as traders waited for more signals on potential rate cuts from the Federal Reserve. As the central bank nears a pivotal moment, financial markets are intensely focused on what lies ahead. Investors are especially eager for confirmation from Fed Chair Jerome Powell on Friday regarding the anticipated rate cuts in September. However, more uncertainty surrounds what will happen afterward and the pace of additional rate cuts as the Fed navigates the challenges of balancing inflation and employment concerns.

‍

Craig Johnson of Piper Sandler noted that "investors climbed a wall of worry last week as the stock market relief rally gained momentum." He anticipates that equities will likely stabilize ahead of the Fed’s commentary at the Jackson Hole symposium later this week.

‍

Ohsung Kwon of Bank of America Corp. shared his view that while the Fed might not exceed market expectations in terms of dovishness, equities could still hold up as long as economic growth remains steady. "Stocks just need a signal that growth will be supported," Kwon explained. He added that while the risk leans towards the upside, Jackson Hole might not trigger the significant equity movements seen in the past when the Fed used the event to communicate upcoming policy decisions.

‍

The S&P 500 experienced fluctuations, with notable developments in the corporate sector. Advanced Micro Devices Inc. announced plans to acquire server maker ZT Systems in a $4.9 billion deal, and Estée Lauder Cos. issued a disappointing sales forecast. Major retailers like Lowe’s Cos, Target Corp., and TJX Cos are set to report earnings this week.

‍

In the bond market, 10-year U.S. Treasury yields remained relatively unchanged at 3.88%, while the yen strengthened by about 1% ahead of key central bank events later in the week. Gold prices dipped after reaching record highs.

‍

Matt Maley of Miller Tabak + Co. noted that "with the Jackson Hole Symposium and Chairman Powell’s speech coming on Friday, there are good reasons for investors to remain cautious this week." He pointed out that while several retailers are reporting earnings, the data expected to significantly influence the markets will be absent this week.

‍

Despite a turbulent period for traders during July and August, enthusiasm for stocks remains strong. Deutsche Bank AG strategists, including Parag Thatte and Binky Chadha, observed that equity positioning has increased to moderately overweight, rebounding from an underweight position the previous week. However, exposure is still below the mid-July highs, remaining within the historical range.

‍

Goldman Sachs Group Inc.'s Scott Rubner, Managing Director for Global Markets and Tactical Specialist, predicted that U.S. stocks are poised to rally over the next four weeks due to favorable technical dynamics and a boost from corporate buybacks. "The pain trade for equities is higher," Rubner wrote, adding that the threshold for bearish sentiment leading into the Labor Day weekend is high.

‍

Recent economic data and corporate earnings have bolstered confidence among traders at JPMorgan Chase & Co. that U.S. stocks could rally towards the end of the year. The team led by Andrew Tyler acknowledged that while the potential for gains appears more subdued than earlier in the year, there is still significant upside.

‍

If the S&P 500 ends higher on Monday, it will extend its streak of daily gains to eight, marking the longest winning streak since last November and tying with six other periods for the longest streak since 2009, according to data compiled by Bespoke Investment Group.

‍

Looking ahead, even after seven consecutive days of gains, the S&P 500 typically continues to show gains, with median increases of 0.58% over the following week and 0.96% over the next month, occurring nearly three-quarters of the time, according to Bespoke.

‍

The direction of stocks is likely to be influenced by the weekly cadence of macroeconomic data leading up to August’s key jobs report, due in the first week of September, as noted by Morgan Stanley strategists led by Michael Wilson. "The true test for the market will be the August jobs report," they wrote. A strong report could signal that growth risks have diminished, while another weak report could rekindle concerns about economic slowdown.

‍

Greg Marcus of UBS Private Wealth Management maintained a generally bullish outlook but cautioned against expecting a straight upward trajectory in the market. "The economy is slowing, and we anticipate a mix of conflicting economic data in the coming months, which will continue to fuel the recession debate," Marcus said. He believes the Fed is on course to cut interest rates by 25 basis points in September unless a significant downside shock occurs.

‍

Marcus advised investors to extend the duration of their cash holdings in preparation for rate cuts. He also emphasized the importance of diversifying within U.S. stocks and preparing for broader market participation, which he believes will likely include value stocks and small caps.

‍

Sam Stovall of CFRA noted that recent economic reports on inflation, jobs, and retail sales have given investors reason to maintain their bullish stance. These reports suggest that the economy remains resilient, inflation continues to decline, and consumer spending is still strong, providing a supportive environment for stocks. Additionally, historical precedents offer some reassurance that the market could continue its recovery, though no guarantees exist.

‍

However, Goldman Sachs Group Inc. strategists, led by David Kostin, warned that Corporate America's sales expectations for the next year might be too high given the outlook for a moderating economy and a weaker dollar. They expect S&P 500 sales to rise by 4% in 2025 compared to 6% this year, noting that the median stock outside the energy sector is more sensitive to the economy and less internationally oriented. By contrast, analysts expect a 5.8% increase in 2025 revenue, according to data compiled by Bloomberg Intelligence.

‍