In recent times, the financial markets have experienced fluctuations that evoke a sense of the “FOMO (Fear of Missing Out)” phenomenonTraders are feeling the urgency to buy on rebounds, driven by the fear of missing out on potential gainsThis behavioral tendency is coupled with strong economic indicators emerging from the United States, as the performance of U.Sstocks has surpassed market expectationsThis resilience is notable even in the face of rising interest rate expectations and geopolitical tensions, such as the ongoing crisis in RussiaThe market sentiment has exhibited a tranquil demeanor amidst these challenges.

According to a recent report from CBOE Global Markets, trading volumes in call options surged to record highs in June

However, it’s essential to note that the overall valuation of the U.Sstock market is currently quite high, which raises the stakes for upcoming earnings performance expectations.

Economic Data Rebounds Boost Rate Hike Expectations

U.SStocks Rally on Cyclical Trends

The release of significant economic data last Thursday reaffirmed the resilience of the U.SeconomyConsumer spending growth has been robust, leading to a significant upward revision of first-quarter GDP growth rates, which now stands at an annualized 2%. This is notably higher than the previous revised figure and exceeds market expectations of 1.4%.

Additionally, the Personal Consumption Expenditures (PCE) price index—an inflation measure closely watched by the Federal Reserve—showed a slight downward adjustment, not maintaining expectations at initial levels

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Furthermore, there has been a 26,000 decrease in first-time unemployment claims from the previous week, marking the largest drop since October 2021.

These developments have heightened expectations for further interest rate hikes within the yearFederal Reserve Chair Jerome Powell recently indicated the possibility of two consecutive rate hikes this yearTraders now estimate there's nearly a 50% chance of two additional rate hikes occurring before year-endOn Thursday, it was observed that yields on two-year U.STreasury bonds—sensitive to interest rate forecasts—rose almost 20 basis points.

The U.Sstock market is witnessing subtle shifts

As the pressure from sustained interest rate hikes mounts, previously thriving tech stocks have experienced a downturn, while bank stocks have gained tractionThis indicates a growing resurgence in cyclically-oriented investingThe Federal Reserve disclosed on Wednesday that all large banks passed stress tests against hypothetical scenarios, including severe global recessions, clearing the path for these banks to potentially resume dividend payments or stock repurchases.

Morgan Stanley recently projected a 25 basis point interest rate hike in July, anticipating the federal funds rate to reach 5.375% by the end of 2023. Furthermore, they expect two additional rate hikes of 25 basis points each to follow, with the possibility of any rate cuts pushed out to at least the second quarter of next year.

Recently, the Bank for International Settlements (BIS) urged central banks to maintain their current course, asserting that “the labor market remains tight and service sector price growth is proving difficult to control.” The BIS cautioned that the risk lies in inflation expectations gaining precedence, which could lead to an invigorating cycle between wage and price increases, suggesting that interest rates may need to remain elevated for an extended period

They warned that inaction could exacerbate risks in the long run and emphasized the importance of reincorporating price stability to protect citizens' purchasing power.

This sentiment appears to resonate across many central banksRecent statements from Bank of England Governor Andrew Bailey have reflected similar concernsBailey argued that the market’s perception of quick inflation relief and an abrupt end to rate hikes is misguidedHe expressed worries about this viewpoint, stating that “we are navigating a world where we are dealing with more persistent inflation, and the peak will not come swiftly.” The core inflation rate in the UK, which excludes volatile food and energy prices, is currently 2 percentage points higher than that of the Eurozone or the United States, posing formidable challenges.

In terms of U.S

inflation, the core CPI and core PCE are currently below cyclical peaks, indicating further signs of moderation in real inflation, known as “super core” inflationHowever, the current annual core PCE rate of 4.6% still significantly exceeds the Federal Reserve’s median projections of 3.9% for 2023 and 2.6% for 2024. If the pace of reduction in inflation continues to be sluggish, the market may only anticipate that the Federal Open Market Committee will hold rates steady without further hikesHowever, the persistent high core inflation might compel the committee to maintain rates in a restrictive zone, aligning with the recent market recalibrations that have entirely discarded rate cut expectations for 2023.

Short-Term Bearish Outlook for S&P 500

Nasdaq Index Falls Back Into Ascending Channel

The S&P 500 and Nasdaq 100 indices have rebounded approximately 20% and 40% this year, which has sparked significant interest regarding future market trends.

Major corporations have driven the S&P 500’s risk-adjusted returns so far this year to 1.5, compared to a mere 0.4 for an equally weighted index

This illustrates how the rebound of a few tech giants has bolstered overall indices while small-cap stocks have rather mediocre performancesThe current valuation metrics for the S&P 500, whether market cap-weighted or equally-weighted, are at relatively elevated levels, indicating that much is expected from companies’ earnings performance moving forward.

Last week, the S&P 500 index concluded a five-week upswingAs technical sell-offs and bleak macroeconomic outlooks weigh in, buyers have adopted a wait-and-see approach, increasing the risk of further corrections in the indexThus, we maintain a bearish short-term forecast for the S&P 500. The recent sell-off stems from concerns over potentially excessive tightening policies by central banks amidst deteriorating economic data

Should future inflation data highlight sticky inflation concerns, the likelihood of interest rate hikes could rise further.

The end of the S&P 500’s five-week rising momentum suggests a loss of bullishness, translating to a greater risk of downward trendsIf the index falls below the support level of 4,345, it may retreat towards a short-term bullish trend line around 4,250, with subsequent bearish targets pointing closer to the February 2023 peak of 4,195. From a bullish perspective, clearer bullish signals are required to restore confidence in a short-term bullish outlookUntil such signals manifest, bulls might need to wait for obvious reversal indicators.

The Nasdaq index has also returned to its ascending channel since the beginning of 2023, moving away from its overbought RSI territory

The doji candlestick pattern highlights the market's indecisionBears need to push below last week's low of 14,785 and test the psychological level of 14,000 before attempting to reach the June low of 14,230. Conversely, on an upward trajectory, a rebound above 14,965 could restore bullish momentum and potentially challenge resistance at 15,287 and new highs achieved this year.

Hot Stocks to Watch in the U.SMarket

Based on market trading sentiments, we have compiled a list of noteworthy stocks to watch in the U.Smarket.

Tesla’s stock price has been under close scrutiny, with analysts recently warning that the stock has surged by 2.5 times since the beginning of this year, indicating rapid and excessive price inflation

Consequently, Goldman Sachs downgraded the electric vehicle manufacturer's rating to neutral, asserting that the current stock price reflects the company’s long-term growth potential and competitive positionMoreover, the pricing environment for new vehicles remains challengingLast week, both Barclays and Morgan Stanley lowered their ratings, while analysts at a German cooperative bank advised investors to take profits and sell.

UBS has also downgraded Alphabet’s rating to neutral, citing recent monetization risks, as the stock fell by 1.4% to $120.58. While concerns over competition and costs are gradually subsiding, the mid-term risks posed by artificial intelligence threaten its advertising businessUBS noted that Meta and Amazon currently boast better risk-reward profiles compared to their large tech counterparts.

Apple's stock price has recently seen a slight dip

During Indian Prime Minister Narendra Modi's recent visit to the United States, CEO Tim Cook met with him, stating that India presents a “tremendous opportunity.” Earlier this year, Apple opened its first retail store in India and plans to expand further to tap into the rapidly growing Indian middle class.

Nvidia has recently faced a pullback after a dramatic surge attributable to interest in artificial intelligence salesThis resurgence previously led to the stock reaching an all-time high last week but has since stalledReports indicate that the stock has gained nearly 200% year-to-date, attracting more ESG funds, with over 1,400 ESG funds holding Nvidia shares directly, while at least 500 more hold them indirectly, making it the most favored stock among fund companies, surpassing Vestas Wind Systems and Tesla.

Last week, the latest Federal Reserve stress tests attracted significant attention from investors, particularly regarding the performance of major banks such as JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, and several regional banks

The results of these reviews were optimistic, determining how much cash these banks need to return to shareholdersThis was the first stress test since the banking crisis in March, which will lead to stricter capital requirements.

Meanwhile, regional bank PacWest Bancorp agreed to sell $3.5 billion in asset-backed loans to Ares ManagementFollowing severe damage from the crisis that erupted in March, the bank is undertaking asset sales to improve liquidity and support its financial health, with the stock price reacting positively to the news with a 7.6% increase.

Moderna’s stock saw a 2.5% rise to $121.42 after UBS upgraded its rating from “neutral” to “buy.” However, some analysts pointed out that its non-Covid-19 vaccine product lines have not received adequate market attention, adjusting target prices down from $221 to $191.

(The views expressed in this article are solely those of the author, and the stocks mentioned are for illustrative purposes only and are not recommendations for purchase.)