USMC - S&P 500: This Rebound Could Be Viable

• The market rebounded sharply in July.
• Investors liked the earnings reports, which were mainly driven by Big Tech results.
• Inflation has likely already peaked in June.
• The Fed will likely start monetary easing next year.
• SPY broke through the top of the descending channel and is now on the verge of a reversal of the global trend.

The S&P 500 ( SPY ) posted a notable corrective gain above 9% last month, making July the best-performing month since November 2020. Since the beginning of the year, SPY has been in a downtrend and such rebounds quickly faded away and the indices plunged deeper and deeper.

However, I do believe that the situation that the American market is in right now is worth looking at and the index has a chance to gain a foothold above current levels.

The earnings season

As of August 5, 87% of all S&P 500 companies have already reported financial results for the second quarter of 2022, according to FactSet . 75% of S&P 500 companies have reported a positive EPS surprise, however, the number and magnitude of positive earnings surprises are still below their 5-year averages.

As I wrote in the article called " The Earnings Season Will Set The Market Direction ", these quarterly results have made a huge impact on stock prices. As most companies have already reported their actual results, we can already draw conclusions for this earnings season, based on the fact that all the mega-cap companies have already issued their reports.

As usual, Apple ( AAPL ), Amazon ( AMZN ), Microsoft ( MSFT ), and Google ( GOOG ) ( GOOGL ) were the focus of attention as investors looked for signals of a reflection of a slowdown in the economy in companies' reports. The market reacted positively to the reports, seeing that fears were mostly exaggerated and headwinds were already priced in. Big Tech dragged SPY up, resulting in updated two-month highs.

At this point, it is important to understand that large-cap techs impact SPY in such a big way not because of their weight in its portfolio (which is 20.7%), but rather because of their dominance in the sector and profitability. The poor results of these companies would mean that even the most efficient players were not able to cope with rising costs and declining demand. This would doom the markets to further decline.

Inflation has probably already peaked

CPI updated the 40-year maximum in June with a 9.1% YoY rise. However, the markets live by the prospect, and inflation is indeed slowing down and, most likely, decreased in July. The data that the majority discusses right now is already outdated, and investors are looking forward to July's inflation data. Investors expect inflation to fall by 0.4% m/m.

The prices peak for raw materials, fuel, and food, is already behind us. Prices for industrial metals, including copper, steel, and platinum, fell to the levels of the end of 2020. Corn prices fell by more than 23% from the April highs, wheat is down 37% and sugar fell by 16%. Brent Oil was trading below $100 in July. This correction mainly took place in July, so we did not observe any easing price pressure in June.

Furthermore, the US consumers themselves expect to see lower inflation in the future. The study of consumer sentiment by the University of Michigan found that household five-year horizon inflation expectations fell more than expected to 2.8% in June vs. 3.1% in May, and the one-year outlook for price increases decreased to 5.2% vs. 5.3% in May.

The Fed factor

The main risk for markets today is not inflation, but a possible recession in the US. While the Fed continues to argue that it can lower inflation without triggering a recession in the economy, it acknowledges that there is less room for maneuver.

The labor market, one of the most important indicators of the health of the economy, which the Fed relies on, remains stable. On Friday, the Non-Farm Payrolls data was published. We saw that 528 thousand jobs were added in July, while the unemployment rate fell to 3.5%. A hot labor market is driving wage growth in the US, which is one of the reasons for high inflation. The Fed has been repeating the same thing for two consecutive meetings: the main task is to bring down inflation, which means that the regulator is likely to make another hawkish step in the next meeting. Investors are now pricing a 0.75% rate hike again.

It is worth noting that some optimism in the stock markets was caused by the confidence of some investors in slowing down the tightening of the Fed's monetary policy and, as a result, lowering the key interest rate in the foreseeable future as we saw two consecutive quarters of GDP decline. However, many, including the FRB of Minneapolis , argue that this is very unlikely and should not be counted on. But I think that this is the basic scenario.

First of all, it is important to remember that interest rate hikes have a delayed effect. The central bank is likely to be able to cool the labor market without causing serious damage to the economy. However, the economy will then continue to slow down. The Fed will have to revise its policy again, given that the plan to reduce inflation is likely to work out. I recommend ignoring the statements of officials about the medium-term policy of the Central Bank right now since we all know how quickly the Fed can change its shoes depending on various situations.

The market is now pricing in one full rate cut in the first quarter of 2023 as the Fed will try to ease the recession fears.

I believe that investors from the very beginning overestimated the Fed's long-term hawkishness. This reversal was long overdue and there were attempts to change the trend, but they quickly drowned in the negative reaction of the market to macroeconomic factors and the withdrawal of liquidity.

Where are we in technicals?

If we take a look at the SPY chart, we will see that it has been in a downtrend since the beginning of the year. SPY broke through the upper line of the channel on July 29 and is now trying to gain a foothold above this mark.

Conclusion

SPY is at a turning point right now. Companies have posted good quarterly results and the peak of inflation is likely already behind us. Markets will continue to experience some pressure from the Fed's monetary policy, but I think investors have already priced in too much and we are now on the cusp of a reversal.

I believe that SPY has upside potential and rate it as a Buy .

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