Dow Jones, Nasdaq, S&P 500 weekly preview: BofA gets more bullish

(SPX) rallied 1.6% last week to hit the 100 weekly moving average (WMA) for the first time since last August. The benchmark U.S. stock market index also printed the highest level (4212.91) in 9 months.

(DJI) added only 0.4% as it struggles to clear the 100-WMA. The index had previously recorded two consecutive red weekly candles.

Tech-focused Index (IXIC) rose as much as 3% in the best week since March. The index now trades at its highest levels since August 2022.

Looking forward to this week, the key economic data releases this week in the U.S. are the core PCE, durable goods, and the University of Michigan reports on Friday. Moreover, the FOMC meeting minutes are out on Wednesday, while several Fed officials are also due to speak this week, including governor Waller and presidents Bullard, Bostic, Daly, Logan, and Collins.

Over the weekend, Minneapolis Fed President Neel Kashkari said that he could take a wait-and-see approach at the central bank’s next meeting in June.

Q1 earnings ‘much better than feared’

With 95% of S&P 500 companies having reported actual results, the Q1 earnings season is close to completion. According to FactSet, 78% of S&P 500 companies have reported a positive EPS surprise and 76% of S&P 500 companies have reported a positive revenue surprise.

The S&P 500 earnings are down 2.2%, with Goldman Sachs analysts saying the earnings so far have been “much better than feared.”

“We view these results as broadly consistent with our forecast of a moderate growth drag from tighter bank credit (-0.4pp on 2023 GDP growth, Q4/Q4 basis). Bank credit has clearly deteriorated for some businesses, but the financial effects so far appear meaningfully larger than the economic effects, in the aggregate,” the analysts said in a client note.

Some of the most important earnings releases for this week include Zoom Video Communications (NASDAQ:), Lowe’s (NYSE:), Palo Alto Networks (NASDAQ:), Nvidia (NASDAQ:), Costco (NASDAQ:), and Best Buy (NYSE:).

Debt ceiling talks continue

The debt ceiling talks are set to continue today with U.S. President Joe Biden and House Republican Speaker Kevin McCarthy due to meet to discuss the deal.

Rep. McCarthy said yesterday that he had a “productive” call with Biden. Investors are focused on the progress as a failure to lift the debt ceiling would trigger a default.

The Treasury officials said the U.S. has money to finance its commitments until “early June.” Goldman Sachs economists forecast that cash reserves could drop below critical $30B by June 8-9.

“The most likely [scenario] is a full-fledged deal that suspends the debt limit to early 2025 along with spending caps (70% chance). There is a small chance this could be announced over the weekend (10%) but we think a deal is more likely later next week (30%) or shortly before the deadline (30%),” the economists said.

The bank’s strategists also see the markets pricing more risk before a potential rally takes place if the deal is finally reached.

On the other hand, Morgan Stanley analysts argue that the “bigger risk for markets now is that raising the debt ceiling could decrease market liquidity based on the sizeable Treasury issuance we expect over the six months after it passes.”

What analysts are saying

Here’s what sell-side analysts are saying about U.S. stocks.

BTIG analysts: “We think the move last week was part of a last gasp blow-off in the Nasdaq. While there was a modest expansion of new highs last week, we will reiterate what we said last week that the weak parts of the market really need to start working or the risk is everything falls together. We saw a bit of the latter on Friday within the consumer space having one of its worst days of the year.”

Morgan Stanley analysts: “We believe this rally will prove to be a head fake like last summer’s. In the very short term, we would not be surprised to see further marginal upside for the major averages if a debt ceiling deal is passed. However, we would view that as a false breakout/bull trap. In that event, the short-term upside could take us back toward the August highs at most, in our view, but should then quickly reverse.”

BofA analysts: “We raise our S&P 500 2023 year-end target from 4000 to 4300 based on five indicators yielding a range from 3900 (Fair Value) to 4600 (Sentiment). We believe investors should ignore the snapshot multiple this target implies – a 21x multiple on 2023 EPS of $200E (tracking $210 after 1Q’s beat). 21x is elevated, but trough multiples have been higher (23x at COVID, 28x at GFC) and snapshot multiples are not particularly predictive. We use a multiple on normalized earnings in our framework, and even here find that this metric is strongly predictive but only over a long time horizon.”

Sevens Report Research analysts: “Not-as-bad-as-feared events have largely fueled the YTD rally and that can continue, especially if the S&P 500 can sustainably breakout to new highs because that will create more “chasing.” But “not as bad as feared” cannot support a sustainable rally (one that lasts for quarters). Point being, the “pain trade is higher,” but at this point it’s long in the tooth. And while it’s not over, it can’t push the S&P 500 sustainably into the mid 4000’s (the valuation will get too stretched).”

Oppenheimer analysts: “We believe underlying trend improvement following last year’s bear cycle supports a breakout in the S&P 500. High-beta cyclicals, under pressure since February, are also finding their footing, in our view. We see this potential for a beta bounce as the likely driver for a breakout.”

Barclays analysts: “We would caution against an overly bullish interpretation (e.g., the rest of the market is cheap) as equities are still exposed to earnings risk and we see few upside catalysts, leaving risk/reward skewed asymmetrically to the downside. A range-bound market is more likely, in our view. That being said, we expect narrow leadership and greater dispersion among stock returns to create selective opportunities, and recommend seeking high-quality names at less demanding multiples.”