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S&P 500 Forecast: Stocks Face Peril as Day of Reckoning Looms

S&P 500 Forecast: Stocks Face Peril as Day of Reckoning Looms

2020-06-02 21:35:00
Rich Dvorak, Analyst
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STOCK MARKET FORECAST – S&P 500, DOW JONES, NASDAQ TARGET RECORD HIGHS DESPITE UNEMPLOYMENT SOARING AND CHINA TENSION ESCALATING AS FLOYD PROTESTS TURN TO RIOTS

  • Stock prices have rebounded handsomely since mid-March as the S&P 500, Dow Jones Index and Nasdaq Composite recoil sharply back toward all-time highs
  • Market sentiment seems just shy of complete euphoria as investor complacency swells in response to the FOMC backstop and hopes for a V-shape economic recovery
  • Bullish equity investors blindly overlook threats from US-China tension escalating, double-digit unemployment rates still rising, and Floyd protests turning into riots

Stocks in the S&P 500, Dow Jones and Nasdaq have ripped higher by about 35% since bottoming mid-March. The relentless stock buying bonanza over recent weeks has propelled popular US equity benchmarks within striking distance of their all-time highs notched earlier this year.

Learn More – Differences Between the S&P 500, Dow, Nasdaq

For instance, the tech-heavy Nasdaq now rests a mere 1.3% away from its 18 February 2020 close at the 9,720-price level after an astonishing recovery from one of the sharpest stock market selloff in modern history. This compares to an equally impressive, though not as strong, rebound notched by the S&P 500 and Dow Jones, which trade about 9% and 13% below their record highs, respectively.

S&P 500 PRICE CHART WITH DOW JONES, NASDAQ OVERLAID: STOCK MARKET INDEX PERFORMANCE (31 DEC 2019 TO 01 JUN 2020)

sp500 price chart S&P 500 Forecast Stock Market Dow Jones Nasdaq Russell 2000

Chart created by @RichDvorakFX with TradingView

Unprecedented amounts of central bank liquidity and government stimulus have flooded markets to shore up sentiment and combat economic fallout from the coronavirus pandemic. An expanded FOMC arsenal, like the Fed backstop for high-yield corporate debt, combined with trillions of dollars in Treasury purchases, stand out as two overarching drivers that have fueled the eye-popping surge in stock valuations to levels last seen during the dot-com bubble nearly two decades ago.

US 500 MIXED
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% 2% 2%
Weekly -18% 14% 4%
What does it mean for price action?
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This has largely allowed the S&P 500 Index to defy the gravitational pull lower from collapsing stock market earnings. The incredible comeback by stocks looks increasingly out of touch with reality, however, as investor complacency builds and unwavering risk appetite crushes volatility.

S&P 500 EARNINGS PER SHARE ESTIMATES FOR 2Q-2020 (% CHANGE)

S&P 500 Price Chart Stock Market Forecast EPS Estimate 2Q-2020

Chart Source: FactSet

In addition to S&P 500 EPS estimates freefalling, the number of unemployed grows by the millions every week, and layoffs do not look temporary on balance as job losses mount. Also, after spending months in lockdown to stop the coronavirus from spreading, which paralyzed the global economy and caused 1Q-2020 US GDP to collapse by a staggering 5%, Americans now gather by thousands amid violent protests over the death of George Floyd across major cities like Minneapolis, Los Angeles, and Chicago.

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Not to mention, as US-China tension escalates in the wake of the coronavirus pandemic, Washington and Beijing have lobbed increasingly terse remarks back and forth over recent weeks, which also follows the alleged blow to Hong Kong autonomy due to the latest national security law imposed. Though details from the Trump-China presser last Friday revealed little appetite from the White House to impose fresh tariffs or scrap the phase one trade deal.

Learn More – A Brief History of Trade Wars: Timeline of Events Affecting Global Trade & Financial Markets

This provided a solid boost to stocks and other pro-risk assets like the Australian Dollar. The move might prove short-lived, however, considering reports over the weekend that Chinese officials, in a rebuke to Trump, told top state-run agricultural firms to shy away from purchasing American farm goods like soybeans.

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Furthermore, the economic calendar indicates that several heavy-hitting data releases are expected this week, like PMI reports and nonfarm payrolls, which have potential to catalyze a deterioration in market sentiment. While increasingly less-horrendous data readings might provide a reason for optimism, and perhaps support higher stock prices, it is difficult to dismiss the fact that over 25 million Americans are unemployed and look past the secondary ‘domino effect’ on consumer confidence, savings, and consumption.

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Correspondingly, while investors overlook the aforementioned bearish headwinds,S&P 500 price outlook seems progressively skewed to the downside as the stock market index fluctuates around astronomically high valuations. Stocks could continue marching higher, however, in light of the trending market and absence of a catalyst that carries enough impetus to ignite a reversal. Nonetheless, it seems increasingly likely the S&P 500 might succumb to a perilous fate if a day of reckoning dishes complacent investors a healthy serving of economic reality.

Read More – Stock Market Forecast: Should I Sell in May and Go Away?

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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