The stock market can rally further, but here’s why it’s too early to celebrate the bear’s demise

How big a market weighting such a monstrous capitalization will command by then is not known. But even now it’s common to hear the refrain that with a 7.6% weighting in the S&P 500, “as goes Apple, so goes the market.” (Yes, we haven’t forgotten you Microsoft, on 6.8%).

The fear of missing out on such momentum is one of the reasons the stock market in aggregate can continue to move higher in the short term, says Irene Tunkel, chief strategist at BCA Research.

Other reasons include: rate rises by the Federal Reserve being nearly over and bonds have stabilized; there is no recession, so far; the earnings recession is “in its late innings”; and there’s lots of cash on the sidelines.

“However, it is too early to celebrate victory,” Tunkel warns. And below are the factors that cause concern.

First the economic. Consumer spending on services, which is a main support of economic strength of late, is set to slow. “According to the ISM [services] PMI, the backlog of orders is already negative, while new orders are declining. This is hardly surprising as spending on services is nearly back to pre-pandemic levels,” says Tunkel.

Consumers’ excess savings are dwindling and their firepower will fall further when student loan repayments are forecast to drain around $5 billion per month from spending. Related: Those extra pandemic savings are now wiped out, Fed study finds.

Next, fiscal stimulus will decline following the debt ceiling deal, and this will happen as a cautious banking system restricts lending alongside indications of a creaking job market.

“There are early signs that both small businesses and non-manufacturing companies are at the latest innings of their hiring sprees, with NFIB job openings falling from 52% to 44%, and the ISM services employment index downshifting to 49,” Tunkel says.

Then there’s the market itself, which is expensive with much of the good news already baked in. Tunkel challenges the view that it’s only what she terms the top crust that is too richly valued.

“[A]nalysis by our colleagues from the Equity Analyzer team has shown that while the top quartile is indeed expensive, trading at 33x forward earnings, the second quartile is expensive too, trading at 21x. The bottom quartiles are outright cheap, trading at 14x and 9x , which is consistent with history. In other words, while the top quartile of the stocks is unusually expensive, the rest of the S&P 500 is either not cheap or not unusually cheap.”

And technical factors point to a market in overbought territory, with the AAII survey of investor sentiment giving its most bullish reading since 2021 and the CBOE VIX
VIX,
+1.56%
below 14. “All of this may be red flags for mean reversion,” Tunkel reckons.

“Our take is that the rally can run for longer, propelled by all the positives, but at some point, a black swan will land, and everything that was happening slowly would start to happen very fast – as the index is expensive, multiples will contract sharply, resulting in a substantial downdraft.”

Markets

U.S. stock-index futures
ES00,
+0.30%

YM00,
+0.68%

NQ00,
-0.29%
rose and benchmark Treasury yields
TMUBMUSD10Y,
3.853%
were also higher. The dollar index
DXY,
+0.38%
was little changed while gold
GC00,
-0.28%
dipped and oil
CL.1,
+0.14%
gained.

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The buzz

U.S. economic data on the slate Thursday include weekly initial jobless claims and the first quarter gross domestic product revision. both at 8:30 a.m. Eastern, followed at 10 a.m. by the May pending home sales report.

Federal Reserve Chair Jay Powell was chatting again early Thursday, this time in Madrid, and he reiterated that more rate rises may be needed to push inflation back to the 2% target.

Stocks in the U.S. banking sector are mostly looking at a higher open Thursday after the Fed said that all 23 banks in this year’s stress tests withstood a hypothetical “severe” global recession and losses of up to $541 billion as well as a 40% decline in commercial real estate prices.

Shares of Micron Technology
MU,
-4.43%
are up 3% in premarket action after the memory-chip maker’s chief executive called the bottom on the sector, and quarterly results released late Wednesday came in better than expected.

Shares of American Outdoor Brands
AOUT,
+9.03%
are jumping more than 8% after the maker of outdoor products and accessories reported a surprise quarterly adjusted profit and said it sees long-term, positive trends for its business.

Virgin Galactic
SPCE,
-10.82%
stock is up more than 3% ahead of the group’s first commercial flight to the edge of space on Thursday.

Best of the web

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The spying scandal inside one of America’s biggest power companies.

A thirsty new Tesla factory comes to a parched corner of Mexico.

The chart

“The chart shows that the vacancy rate for the U.S. office property type has steadily increased over the past three years and now stands at a recent high point of 12.9%. This trend may continue as companies continue to re-evaluate their long-term needs for office space as their leases expire. The fact that many companies continue to pay for under-utilized office space may mask additional underlying weakness in current tenant demand,” says Wells Fargo in a new note.

“Although the office property type continues to face several near-term headwinds, other property types such as industrials continue to exhibit relative strength despite the rising interest rate environment. As a result, we continue to maintain our neutral guidance on private real estate overall,” the bank concludes.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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