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With the S&P 500 off 17% of its June low, strategists are issuing warning notes to investors that the reversal may take place soon.
Technicals and positioning are less depressed at current levels, which leaves space for reversal given that the benchmark U.S. stock index trades near 4300, and only c.10% down YTD.
“Peaking inflation, a perceived Fed dovish pivot and better than feared Q2 earnings led to a sharp rebound in equities from oversold levels, helped by falling yields and a weaker USD. However, hawkish rhetoric by prominent Fed speakers has pushed yields and the dollar back up again in August, but without altering the rally in equities this time around,” a Barclays strategist wrote in a client note.
The strategist argues that the reversal may start to take place next week when the market begins to hear from Chair Powell and other policymakers at the annual global central banking conference in Jackson Hole.
“Our view remains that it is far too early for CBs to claim victory on their fight against inflation although falling oil price reinforces the disinflation mindset, latest CPI data in UK and EU show there is still a long way to go before broad based inflationary forces roll over,” he added.
In this aspect, Powell’s speech at Jackson Hole next week is seen as an “important catalyst.”
“The key for equities is whether Powell will push back against the view of a 2023 easing cycle and guide towards a higher terminal rate, or if he keeps optionality,” he concluded.
