The S&P 500 has continued to march higher, rising 25% year to date and 32% from a year ago. In a time marked by lockdowns and an economy ravaged by the Covid-19 pandemic, we might wonder why the benchmark index is sitting at all-time highs.
Nobel laureate Paul Krugman reminds us that the stock market is not the economy. It’s about one part of the economy: corporate profits. And they‘ve been soaring since the pandemic began.
A report from FactSet revealed that companies in the S&P 500 are heading for near record profit margins, despite rising inflation. But, increasingly hawkish language coming from the Federal Reserve (Fed) threatens to put the brakes on the rise in stocks.
S&P 500 analysis: Fresh record highs
Last week, St. Louis Federal Reserve President James Bullard suggested that the central bank should accelerate its reduction of monetary stimulus to offset rising inflation. In a November 16th interview on Bloomberg TV, he stated:
“I think it behooves the committee to go in a more hawkish direction in the next couple of meetings so we are managing the risk of inflation appropriately.”
The S&P 500 shrugged off the statement amid upbeat retail and technology earnings reports, and reached record closing highs on Thursday (18 November). The index closed slightly lower on Friday as fears mounted that a Covid-19 fourth wave could cause a return to lockdowns across Europe. On 22 November, Austria returned to full national lockdown. Last week, the country made Covid vaccinations a legal requirement from February.
S&P 500 technical analysis: steady rise
On the daily chart, we see the index’s steady rise throughout 2021, and one major selloff in October. Selling was driven by a shift away from technology stocks in response to rising treasury yields.
Technology stocks have high valuations based on anticipated future growth, and higher interest rates dampen growth prospects. Fresh US-China tensions over Taiwan also caused market jitters.
Looking at the daily chart above, we can see a well-defined channel has formed as the index powered steadily higher. Price breaking out above the upper trendline could open the door for a move to the key psychological level at 5,000.
S&P 500 outlook: Longer term view
Zooming out to look back over the past 5 years, we can see that the S&P 500 index was in a steady uptrend until the selloff in February and March of 2020, at the beginning of the Covid-19 outbreak.
This was the largest market correction since the financial crisis of 2008. The index shed 30% of its value, dipping well below the 200-day moving average on the weekly chart. After recovering, the S&P 500 resumed with a sharper uptrend.
Major S&P 500 price drivers
We’ve looked at some factors causing selloffs over the past year and 5 years. Now let’s take a look at key factors behind the S&P 500’s remarkable advance.
Fed policy: The rally since the 2008 financial crisis was in large part propelled by expectations that interest rates would remain low. Throughout the Covid-19 crisis, the Fed reassured investors that they would use their toolkit to support markets. In March 2020, the Fed moved to support the markets by pledging to buy both investment-grade and high-yield corporate bonds.
Fiscal policy: Congress has pumped trillions of dollars into the US economy through multiple relief bills. The federal government has allocated nearly $5trn in Covid-19 relief, including stimulus checks and unemployment benefits. This gave people money to spend, which in turn helped corporations.
Boom in tech stocks: Tech stocks – the S&P 500’s top movers – have soared during the Covid-19 pandemic. According to Statista, the ‘Big Five’, also known as GAFAM (Alphabet (Google), Apple, Meta (Facebook), Amazon and Microsoft) dominated the S&P 500 Index as of 19 November 2021.
Bond Yields: Since 2009, bond yields have generally been low. Low bond yields have forced investors to look for other places to invest their money, with stocks being the most obvious choice.
S&P top gainers YTD
Looking at the S&P 500 biggest risers, as of 22 November 2021, we can see that two energy companies (Devon Energy Corporation and Marathon Oil Corporation), two technology companies (NVIDIA Corporation and Fortinet) and one pharmaceutical company (Moderna), according to Slickcharts.
Devon Energy Corporation is a leading independent oil and natural gas exploration and production company.
Nvidia designs graphics processing units for the gaming and professional markets.
Moderna is a pharmaceutical and biotechnology company and maker of the Moderna Covid-19 vaccine.
Fortinet develops and sells cybersecurity solutions.
Marathon Oil Corporation is an independent energy company specializing in exploration and production.
S&P 500 top losers YTD
Among the five biggest decliners in the S&P 500, we can see three technology companies (Citrix Systems, Global Payments and MarketAxess Holdings) and two casino companies (Penn National Gaming and Las Vegas Sands), according to Slickcharts as of 22 november 2021.
Citrix Systems is a software provider, which delivers application and desktop virtualisation, networking, software as a service (SaaS, and cloud computing solutions.
Las Vegas Sands Corporation is a casino and resort company.
MarketAxess Holdings is an international financial technology company that operates an electronic trading platform for the institutional credit markets.
Penn National Gaming is an operator of casinos and racetracks.
Global Payments is a technology and software company, providing commerce solutions.
S&P 500 forecast
Chief US Economist at Oxford Economics, Gregory Daco, has analysed the Fed’s statement:
#Fed #FOMC November statement— Gregory Daco (@GregDaco) November 3, 2021
▶️QE tapering starts this month
▶️Fed funds rate unchanged
▶️#Inflation elevated because of supply/demand mismatch & "expected" to be transitory
▶️No dissents pic.twitter.com/dn6nWbLn3t
What impact could this have on stocks? These analysts shared their S&P 500 forecast for the coming weeks and months.
UBS Global Wealth Management’s Nadia Lovell had an upbeat view when speaking to Bloomberg Surveillance on 19 November. Reflecting on the outlook for 2022, she said: “It will be a year of two halves. The first half being elevated economic growth, looking for growth in the range of 4 to 5% and high inflation. But as the year progresses and things normalise, we’re looking for the second half to be lower growth, still healthy and above trend, and more subdued inflation. So we think in that environment the S&P can reach 5,000 by the time we get to June of next year.”
Commenting on the S&P 500 forecast, Capital.com’s Chief Market Strategist, David Jones, said: “This has been a great year for stock markets and the S&P 500 is no exception. At the time of writing [22 November], the index is up by around 25% for the year to date and has, once again, moved out to fresh all-time highs in November.
“Investors are certainly getting more worried by inflation in the last quarter of 2021 and it does look like this will be much more of an issue than central banks first thought. Nevertheless, stocks are still strong. The S&P did have a sizable pullback during September but has since shrugged this off and pushed higher. It has more than doubled since the March 2020 low, hit as the Covid-19 pandemic started to spread globally.
“Some may think that for the stock market to be worth double the amount from back then in a little over 18 months is a ridiculous over performance. Whilst this may be a valid view, it is very difficult to argue with the strength and resilience of this market and would not be surprising to see fresh all time highs hit once more this year. The trend is up, the lows from October around 4300 have proved to be important ones and for me, only if it fell below there would I start to worry that this incredible run over the past 20 months is finally in trouble.”
When looking for S&P 500 predictions, it’s important to bear in mind that analysts’ forecasts can be wrong. Analysts’ projections are based on making a fundamental and technical study of the index performance. Past performance is no guarantee of future results.
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