Despite an increased interest in AI and the fast growth of AI-related stocks, they cannot save the whole stock market. The return of high rates and new alternatives increase the S&P 500’s correction risks. Let’s discuss it and make a trading plan.
Monthly fundamental forecast for S&P 500
Financial markets are experiencing some tectonism. The fed funds rate has reached the highest in 2 years, and US bond yields were last seen at the current levels in 2007. So, it’s unsurprising that investors have some alternatives to stocks. Net money outflows from the ETFs focused on shares have amounted to $11.6 billion in the past five weeks, and they will likely continue, allowing us to speak about the S&P 500’s correction.
A choice is simple when there are no alternatives. The epoch of the Fed’s unprecedented monetary stimuli dropped bond yields to historical troughs and pushed the S&P 500 to its record high in early 2022. Buying stocks was considered a sure option, which isn’t the case now.
Ten-year bonds offer a 180-basis-point yield premium over the dividend returns from stocks, for the first time in 15 years. Even rates for investment-grade corporates are now more attractive than returns on stocks.
Bonds and stocks yield dynamics
Unsurprisingly, bond-focused ETFs have seen increased money inflows for 21 consecutive weeks, while money market funds have attracted $91 billion in the last five weeks, a 25% increase to $1.5 trillion, the Fed estimates. Money market funds boasting the same reliability as a bank offer a 5.15% return on investment, a peak value since 1999.
The epoch of the Fed’s cheap liquidity is over, allowing us to say the stock market bubble is about to burst. It has already started doing that, actually. Still, the S&P 500 bulls managed to counter-attack amid Nvidia’s revenue growth by $13.5 billion in 2Q, further growth expectations to $16 billion in 3Q, and EPS coming in above forecasts. The counter-attack didn’t last long: stock indexes have one more structural problem besides 5% yield rates.
A handful of AI-related companies allowed the S&P 500 to rise by 14%. The rest are not as bright. All the sectors included in the broad index were in the red area in August.
S&P 500 sectors’ trends
Source: Wall Street Journal.
What we see now isn’t a mere correction of the stock market. It’s a re-estimation of reality. It’s about finding alternatives to stocks. If so, the pullback will continue. Whatever Jerome Powell may say at Jackson Hole, investors should understand that the fed funds rate will remain high for long, which harms all risky assets, from stocks to cryptos.
Monthly trading plan for S&P 500
Thus, selling the S&P 500 on breakouts at 4563 and 4547 at the beginning of August was a good idea. Then, the index tried to touch the bottom at 4360, allowing us to reverse and make money. Now, we can return to shorts with a target at 4300 and 4265.
Price chart of SPX in real time mode
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