Stock market rally looks increasingly out of sync with macro fundamentals, say experts

Stock market rally looks increasingly out of sync with macro fundamentals, say experts

Add another voice to the growing chorus of naysayers about the staying power of the recent rally in U.S. equities.

The stock market rallies since the Federal Reserve jumbo rate hike in late July looks increasingly out of sync with macro fundamentals, especially the roaring U.S. labor market, according to economists at Mizuho Securities.

Steven Ricchiuto, chief U.S. economist at Mizuho Securities and Alex Pelle, a U.S. economist, wrote in a Monday client note that investors have been betting on the Fed to pivot away from its aggressive rate-hiking stance next year.

The anticipated reversal of policy in 2023 requires a highly unusual deceleration in inflation from the over 9% year-over-year rise reported last month, according to the team.

A 2023 reversal of policy could be triggered by an unforeseen financial debacle, but these types of dislocations are never good for risk assets, so the equity rally looks out of sync with the macro fundamentals. The teams wrote that the markets need to take a tighter fiscal policy on top of the ongoing Fed tightening due to the approval of the Inflation Reduction Act, a big healthcare, climate and tax package, and the Inflation Reduction Act by Senate Democrats on Sunday.

President Biden called the bill a measure that will immediately help, including provisions that include a $2,000 cap for seniors on prescription drug costs.

Ricchiuto and Pelle warned of the risks of pulling down corporate growth and earnings. We see the recent rally as another bounce within a bear market that should run out of steam before 4200 on the broad market index, implying that this is now the upper end of the trading range. The S&P 500 index SPX was lower on Monday after Friday booked its best three-week percentage gain since April 1, according to Dow Jones Market Data. The index was down 13.1% on the year, ending at 4,128. According to FactSet, 97 was Monday.

The 10 year Treasury rate TMUBMUSD 10 Y has found a footing above 2.7%, as the U.S. bond markets have rallied from their worse levels of the year. While the U.S. investment-grade corporate bond market was at a negative 11.5% annual return through August 4, its performance has improved from June low see chart Even so, Mizuho s economists said that investors are betting that the labor market is in 2023, despite the fact that investors are discounting rate cuts by the bond market.

The data doesn't show that the data is ready to crack. The scope of the market move is attracting attention. Strategists at Jefferies noted that the S&P 500 was about to send a signal that has tended to precede big market moves, albeit in the opposite direction.

A surging stock market is on the verge of signaling a huge move, but there is a catch.

Mizuho s team urged caution, saying that it would take a major break in the labor market for the Fed to reverse its inflation-fighting course.

After hot July jobs report, stock-market investors are wrestling with a boomflation.