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Violeta Todorova

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S&P 500 Retreats Amid Lowered Rate Cut Odds

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  • Nonfarm payrolls loom large
  • Sticky inflation lowers the odds of a rate cut in June
  • Stock market starts the second quarter on a back foot

Nonfarm payrolls in the spotlight this week

The focal point of the week in financial markets centres around the forthcoming release of U.S. employment data, slated for Friday. The labour data holds significant sway over investor sentiment, particularly amidst prevailing optimism that the economy could achieve a soft landing. Following a stellar first quarter performance in the stock market, all eyes are on the nonfarm payroll report, which is anticipated to reveal a moderation in job creation with an expected addition of 205,000 jobs for the month of March, down from the 275,000 jobs created in February.

Federal Reserve’s stance on interest rate cuts

Increased investor confidence in the likelihood of a soft landing scenario were boosted after the Fed at its March meeting reiterated its view of three rate cuts this year, while upgrading its outlook for economic growth. According to the CME FedWatch tool markets are now pricing in 56% chance of the Fed cutting rates in June with traders expecting a total of 75 basis points of rate cuts this year.

PCE data in line with expectations

Last Friday the Commerce Department report revealed the annual rate of Personal Consumption Expenditure (PCE) index slightly increased to 2.5% in February from 2.4% in January, in line with estimates. Meanwhile, the annual rate of growth of the core PCE index, which exclude the volatile food and energy items, slowed to 2.8% in February from an upwardly revised 2.9% in January. The report raised concerns about whether inflation is slowing quickly enough to guarantee the expected interest rate cuts signalled by the Federal Reserve.

Can the rally extend into the second quarter

The S&P 500 had risen more than 10% in the first quarter, boosted by optimism over artificial intelligence stocks and expectations of rate cuts in the second half of the year. With the commencement of the second quarter, the trajectory of the stock market is likely to continue to hinge on the Federal Reserve’s policy trajectory and on corporate earnings, which get underway in April. Despite initial expectations of six rate cuts in 2024, market sentiment has adjusted, with only three cuts of 25 basis point each currently priced in. However, lingering uncertainties regarding the inflation outlook, raises questions about the Fed’s future interest rate decisions.

Technical analysis

The S&P 500 enjoyed a strong first quarter performance with last week’s price action reaching a fresh record high of 5,264. However, the second quarter for the stock market is off to a rocky start with the index correcting over the past two days, as last week’s inflation data reduced the odds of a rate cut in June and pushed Treasury yields higher. The index rebounded to its channel line crossing at 5,200 which is likely to act as a resistance in the short-term. The large bearish divergence between the price and the Relative Strength Index (RSI) indicator, which has formed over the past three months, shows that momentum is deteriorating and suggests the rally is vulnerable to a pull back. In our view, such potential weakness is likely to be short-lived. Over the long-term, the outlook for the S&P 500 remains bullish and levels in the range between 5,400 and 5,500 appear achievable before the end of the year.

A graph of stock market

Description automatically generated

Source: TradingView

Valuation Concerns and Market Caution

While the S&P 500 continues to hover near record highs, concerns over stretched valuations persist, with forward earnings multiples exceeding historical averages. Therefore, from a fundamental standpoint a correction may be imminent before we see signs that earnings growth could be sustained to justify valuations. While this doesn’t necessarily mean the rally from the October 2022 low is nearing its end, high valuations typically lead to weaker returns in the months ahead.

Continued Monitoring of Economic Indicators

Inflation and labour market reports are the key data that will continue to shape market expectations ahead of the Fed’s upcoming meeting in June. Despite a broad-based rally in the first quarter, characterized by increased participation from industrials, financials, energy, communication services, and information technology sectors, investors would be looking for further signs the market rally is sustainable.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

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Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

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