Market Pulse

In focus

After reaching its lowest level since November 2020, U.S. equity markets rallied nearly 5% last week. Several factors likely contributed to the strength of the bounce with sentiment being one of those.

With sentiment reaching extreme bearish levels after another high inflation print earlier this month, investors turned bullish hoping the negative sentiment was a sign of capitulation. Bank of America’s Global Fund Manager Survey provided another bearish signal, highlighting that fund managers’ cash allocations reached their highest levels since 2001. In addition to other technical factors, the depressed sentiment and extreme bearishness set conditions up for a near-term rally. Our view was that one of the biggest assets for the market was depressed sentiment. This allowed a little good news to go a long way.

While depressed investor sentiment helped with a short-term rally, market participants will be focused on earnings as they gauge the resilience of Corporate America and what this could mean for markets on a more sustained basis. Importantly, investors will be watching if corporate leaders’ economic expectations materialize through downward earnings revisions or if the strength of consumer and corporate balance sheets will be enough to withstand the extreme financial tightening set to unfold by the Federal Reserve (Fed). 

A look back

• Equity markets rallied off year-to-date lows from a week earlier led by U.S. stocks, which ended the week up by 4.8%.
• U.S. Treasury yields moved higher again last week with the 10-year yield rising more than the 2-year yield, steepening the 2-/10-year yield curve by 13 basis points (0.13%).
• Existing single family home sales dropped for the eighth-consecutive month with prices across all regions declining.

A look ahead

• Earnings season kicks into high gear with over 160 companies from the S&P 500 reporting third quarter results this week.
• Investors will be awaiting Friday’s update on the Fed’s preferred inflation gauge, Personal Consumption Expenditures (PCE).
• Economic releases: S&P Global U.S. Manufacturing & Services, Wholesale Inventories, New Home Sales, Durable Goods Orders, GDP, and PCE. 

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