S&P 500 Recovers Most of Recent Losses After the Best Week of 2024

US stocks have whipsawed in August. The S&P 500 which peaked in mid-July, entered into a correction territory in the first week of August amid the global market sell-off. However, it is now only 2% away from its record highs after the stellar gains last week which happened to be the best week for markets in 2024.

Last week, the S&P 500 rose 3.9% while the tech-heavy Nasdaq Composite added 5.1%. Nvidia was among the top gainers and rose 18% to reclaim its $3 trillion market cap.

S&P 500 Nears Record Highs

Commenting on last week’s price action, Mark Haefele, UBS head of investment for global wealth management said, “Data released over the past week has struck the right balance, being not too hot, nor too cold.”

Notably, advanced retail sales rose 1% in July which was higher than the 0.3% monthly rise that economists were expecting. Weekly jobless claims on the other hand came in at 227,000 which was 7,000 lower than the previous week. The metric was also better than the 235,000 that economists were expecting.

Notably, the data points allayed two of the key concerns about the world’s largest economy and are a sign that the labor market is not deteriorating to the extent some fear while the economy is also not slowing as rapidly.

According to Haefele, “This should help allay both concerns of a looming recession or that sticky inflation will hamper the Federal Reserve if swift rate cuts are needed to defend growth.”

As concerns over the US economy and labor markets eased, the S&P 500 also roared back and is now within a striking distance of its all-time highs.

Morgan Stanley Calls for S&P 500 to Rise to 6,000

Morgan Stanley’s Investment Management’s Andrew Slimmon believes that the S&P 500 would be “closer to” 6,000 by the end of 2024 after bottoming in October. According to Slimmon, “And maybe that’s some of the AI plays that were red-hot in June … So I think you were in a period of time here where the market’s in a dicey shape.”

He added, “But I think going into the fourth quarter, you want to own the stocks that were winners the first half of the year, I think they’ll come roaring back. And I think that will be good for active management.”

While he sees markets having a tough third quarter, he predicts them trading strong in the final quarter of the year.

“I’m trying to sort through companies that have had the best fundamentals, that have sold off recently and trimmed back … So, there is an opportunity to what I would call fundamentally grade up your portfolios into companies that are showing the best earnings revisions, the best fundamentals,” said Slimmon.

Capital Economics also reiterated its target for the S&P 500 and said, “Our end-2024 forecast for the S&P 500 remains at 6,000, driven by a view that the AI narrative which dominated in the first half of the year will reassert itself.”

Divergence in US markets

Meanwhile, while the broader markets have risen to record highs, the dismal returns of the Dow Jones Industrial Average Index and the divergence between tech and other sectors suggest underlying pain in the US economy.

Around 150 S&P 500 constituents are in the red this year even as the index is up in double digits and trading near its record highs. There has been a divergence in the fortunes of tech stocks and other sectors of the economy some of which are facing severe slowdown.

Markets Would Watch Powell’s Comments at Jackson Hole

On Friday, Fed chair Jerome Powell is set to speak at Jackson Hole which could be among the week’s most important events along with the minutes of Fed’s July meeting that are scheduled for Wednesday.

Over the last month, Federal Reserve chair Jerome Powell has made some very dovish comments. Last month, speaking with David Rubenstein, chairman of the Economic Club of Washington, D.C., and co-founder of The Carlyle Group, Powell said that the Fed won’t wait for inflation to drop to 2% before it starts cutting rates.

The odds of a Fed rate cut by September rose to 100% and rising optimism over lower rates is also helping support the rally in US stocks.

In their note, BNP Paribas analysts wrote, “We think a key highlight of Powell’s speech will be the acknowledgement that progress on inflation has been sufficient to allow the start of rate cuts.”

Soft Landing Hopes Lift S&P 500

After the economic data last week, optimism over a soft landing for the US economy rose while recession fears abated. “You can’t necessarily rule out the hard landing scenario outright, but there’s a lot of reason to believe that at this point that economic momentum is being sufficiently sustained,” said Jim Baird, chief investment officer with Plante Moran Financial Advisors.

Meanwhile, markets would next watch the Fed commentary in the coming week for signs that the US central bank might cut rates in September as widely expected. Optimism over a September rate cut helped catapult the S&P 500 higher last week and if Powell’s comments turn out to be hawkish than expected, markets might pare gains.