S&P 500, Nasdaq 100 Forecast for Week Ahead: Path Higher Difficult but Possible

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Most Read: US Dollar Maintains Bullish Bias as Economic Resilience Gives Fed No Reason to Pivot

After the August sell-off, U.S. stocks have begun to perk up in September (at least through Friday morning before the long weekend), although negative seasonal factors associated with the last month of summer may complicate the rebound attempt. In any case, it is important to underscore that there are encouraging developments that could still support risk assets and limit further downward movements heading into the latter part of the year. For instance, the economy is holding up incredibly well despite numerous headwinds, with recent manufacturing and labor market results backing this argument.

On the employment front, hiring momentum, while cooling compared to the robust post-pandemic pace, has remained extremely resilient for a country navigating choppy waters and presumably in the late stage of the business cycle. This situation will keep spending, the main driver of the consumption-oriented U.S. economy, afloat,increasing the likelihood of a soft-landing. Under this scenario, corporate earnings may still soften, but will not take the calamitous hit typical in a recession.

Focusing on consumer prices, inflation remains at multi-decade highs and more than four times above the U.S. central bank's long-term target of 2.0%, but is showing tentative signs of cooling, thanks in part to falling energy costs. Average hourly earnings are also moderating, as seen in the August NFP report, probably helped by the sharp rise in the participation rate from 62.1% to 62.4%. The greater availability of workers is certainly good news insofar as it may help reduce wage pressures, making it easier for the Federal Reserve to tame sky-high CPI readings.

With inflation indicators moving in the right direction, the Fed may become slightly less hawkish, but it is too early to position for a "dovish monetary policy pivot," especially after the Jackson Hole Symposium, when the FOMC chairman indicated that restoring price stability will require maintaining a restrictive stance for some time, warning against a premature change of course.

The specter of higher interest rates for longer is a recipe for volatility and unpredictable swings in the stock market, but the economic resilience clearly confirmed by recent data should contain the overblown pessimism on Wall Street, easing concerns that the country and thus corporate profits are headed for the cliff. Against this backdrop, there may be room for a small rebound in the S&P 500 and Nasdaq 100 in the coming days and weeks, but the recovery is likely to be more rocky than linear.

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