The stock market has defied gravity this year, rallying sharply higher in the face of weakening jobs data, rising inflation, and tariff-driven headwinds to profits.
The 35% rally in the S&P 500 since President Donald Trump paused most reciprocal tariffs in early April and the 15.5% gain year to date have been impressive, but worries are growing that the rally may be on fumes.
S&P 500 returns, including dividends, by year:
- 2024: 24.9%
- 2023: 26.1%
- 2022: -18%
- 2021: 28.5%
- 2020: 18%
Source: NYU/Stern
The unemployment rate has risen to the highest level since 2021 and inflation, as measured by the Consumer Price Index, is going the wrong way, climbing to 3% in September from 2.3% in April before most tariffs went into effect.
The economic backdrop has many investors scratching their heads, wondering if it’s too late to buy, especially with the S&P 500’s forward price-to-earnings ratio (P/E ratio), a key valuation measure, near 23, a level that historically precedes lackluster returns.
The potential risks aren’t lost on Wall Street, and many analysts are adjusting their forecasts, including Bank of America, one of the largest investment research firms.
S&P 500 climbs wall of worry
The best returns occur from stock market bottoms. Unfortunately, nobody rings a bell signaling market highs and lows, making it challenging for investors to know what may happen next.
Uncertainty has been particularly high this year because of tariffs. This spring, President Trump rolled out higher-than-anticipated import taxes, sending the S&P 500 reeling nearly 20%, leading Wall Street to reconsider profit outlooks and investors to head to safety.
So far, companies have primarily been able to make up for the hit to their bottom lines by:
- Negotiating lower prices from vendors
- Cutting costs, including payroll
- Passing along price increases to consumers
According to FactSet, earnings for companies in the S&P 500 are expected to have risen 9.2% in the third quarter. Their net profit margin is estimated at 12.8%, up from 12.4% last year.
Companies’ resiliency has undoubtedly contributed to investors’ animal spirits, but the verdict is still out on whether decisions, including layoffs and price hikes, will derail the U.S. economy.
There are signs of struggles. Challenger, Gray, & Christmas reports that U.S. employers have laid off nearly 1 million workers this year through September, the most since Covid, and up 55% from last year. Payroll giant ADP says that the U.S. economy lost 32,000 jobs in September.
More Wall Street:
- Why 2 major asset managers just suspended investments into silver
- JP Morgan CEO issues blunt warning on auto industry bankruptcies
- Bank of America hiring data rings alarm on economy
“Despite the strong economic growth we saw in the second quarter, this month’s release further validates what we’ve been seeing in the labor market, that U.S. employers have been cautious with hiring,” said ADP Chief Economist Nela Richardson.
A weaker jobs market isn’t great news for consumer spending, and reports from the Institute for Supply Management (ISM) are worrisome. In September, the ISM Manufacturing Index was 49.1, and its Services Index was 50, a level we haven’t seen since exiting the Great Recession in 2010.
S&P Global’s flash Purchasing Managers Index for October, released Oct. 24, showed:
- Waning business optimism in the U.S.
- Rising unsold inventory in manufacturing
- Lower export orders and squeezed margins
The Flash October PMI from S&P Global last Friday confirmed inflation pressures remain… companies are having a harder time passing through cost increases.
Chris Versace, TheStreet Pro portfolio manager
ISM’s October Manufacturing and Services PMIs and ADP’s October Employment Report will shine more light when reported on Nov. 5.
Bank of America analyst reconsiders S&P 500 targets
One way that investors can gain insight into what may happen to stocks next is to use technical analysis, which analyzes price history and chart patterns for clues.
Bank of America’s Global Chief Technical Strategist Paul Ciana has tracked the markets for over 15 years, so he’s seen some major tops and bottoms, including during the Great Financial Crisis and Covid.
Ciana updated his market thoughts in a note sent to clients and shared with TheStreet. In it, he provided a mostly bullish forecast but noted key levels that would make Wall Street antsy.
A bullish reaction to US CPI data broke the SPX out of a 5wk range as it pursues 7,000.
Bank of America Chief Technical Strategist Paul Ciana
“The breakout, Q4 seasonality and some MACD crosses are bullish trend themes,” and the “SPX continues to climb the wall of worry,” Ciana says.
He estimates upside in the S&P 500 to 6,980 and noted that patterns show price extension levels at “6,840, 6,976, and 7,086.”
The S&P 500 is 6,857.55 at last check.
That said, Ciana doesn’t think the coast is entirely clear. While he doesn’t see a top yet, he noted key risks that could cause selling, including:
- The S&P 500 is near the top of an upward-sloping channel.
- The percentage of stocks in the index above the 10-week simple moving average (SMA) has diverged since June.
Stocks tend to get extended near the top of the channel, suggesting some risk of a pullback. Meanwhile, Ciana prefers broad stock market rallies that include most stocks trading higher with the index, which hasn’t happened since the summer.
This divergence can suggest a market rally getting a bit long in the tooth.
What would get him less bullish? A close below the 50-day moving average.
“Downside risk may increase if the index breaks below its 10-week SMA now at 6,602,” said Ciana.
That said, history favors bulls.
“When SPX up year-to-date ending October, Nov.-Dec. up 79% of time with an average gain of 3.99% and median of 4.26%,” said Ciana.
