S&P 500 drops on Tuesday as stock markets correct before Powell testimony

Fed Chair Jerome Powell will address the House Financial Services Committee on Wednesday.
KB Homes, FedEx and Darden Restaurants all report earnings this week.
The S&P 500 has gained for five straight weeks.
The S&P 500 is overbought on the Relative Strength Index.

The S&P 500 index is likely nearing a pullback. The index has gained for five straight weeks and now appears overbought on the daily chart’s Relative Strength Index (RSI). Despite Friday’s 0.37% decline, the index advanced 2.58% in the week ending June 16.

Now on Tuesday, the S&P 500 dropped 0.46% to 4,373 more than an hour into Tuesday's Wall Street session as the market digested slower expectations for Chinese economic growth. Goldman Sachs downgraded 2023 GDP growth in China from 6% to 5.4%.

The primary concern for the index and the wider markets this week is Federal Reserve (Fed) Chairman Jerome Powell’s testimony to US legislators. Powell will address the central bank’s ongoing strategy for dealing with inflation and the overall economy with the House Financial Services Committee on Wednesday and with the Senate Banking Committee on Thursday.

This week offers shortened trading due to the Juneteenth holiday observed on Monday.

S&P 500 News: Powell’s speech will lead markets

Jerome Powell heads to Capitol Hill this week to answer questions from US legislators. The inquiries will probably be fairly mundane as Powell announced at last week’s FOMC meeting that the Federal Reserve will pause its campaign of interest rates hikes for now. Members of both committees will likely seek to discern if more rate hikes are still on their way. In his speech on June 14, Powell left the door open for two more hikes later in the year, but these hikes will depend on whether disinflation stalls.

The S&P 500’s five-week winning streak is largely the result of the market expecting this pause, so any hint from Powell that even one more rate hike is probable will send the S&P 500 lower for the week. The fed funds rate is currently locked in the 5% to 5.25% range, and Powell has emphasized that the FOMC is unlikely to cut rates until inflation falls back to 2%. Most experts believe this will not happen until sometime in 2024.

Other parts of Powell’s testimony may concern the direction of the US Dollar. The Greenback (DXY) has lost value for three weeks in a row against a basket of foreign currencies.

In addition to Powell’s remarks, Tuesday will see the release of US housing starts data, and on Friday S&P Global will release its worldwide Purchasing Manager Index for both the services and manufacturing sectors.

FedEx earnings followed by KB Homes, Darden Restaurants

With much of the S&P 500 companies already reporting first-quarter earnings in May, the calendar is sparse. However, several important index components report this week that will give investors a good idea of the health of the American consumer.

FedEx comes first with their fiscal Q4 results in Tuesday’s post-market. Wall Street consensus is calling for $4.84 in GAAP earnings per share (EPS) on $22.66 billion in revenue. That is a far cry from the year-ago quarter’s $6.87 on $24.39 billion, so it should be an easy beat for the shipping company. The results could be significant for the S&P 500 as the $58 billion company makes a good proxy for the health of the US economy.

Then on Wednesday KB Home (KBH) will give the market a glimpse of the housing sector. Analysts have an average expectation of $1.34 per share in GAAP EPS on revenue of $1.42 billion. KBH stock is up 56% this year as the market has U-turned from the belief that higher rates would hold back home purchases to the current thesis that the US housing market is far too tight to let higher rates deter demand.

Darden Restaurants (DRI) reports earnings early on Thursday and will give the market a good idea of how freely the average US consumer is spending. Analysts are quite mixed on their outlook for the owner of the Olive Garden and LongHorn Steakhouse restaurant chains, among others. Consensus calls for $2.54 in GAAP EPS on $2.77 billion in sales. This would amount to a decent gain over the year-ago quarter’s $2.27 per share on $2.6 billion in sales.

S&P 500 FAQs

What is the S&P 500?

The S&P 500 is a widely followed stock price index which measures the performance of 500 publicly owned companies, and is seen as a broad measure of the US stock market. Each company’s influence on the computation of the index is weighted based on market capitalization. This is calculated by multiplying the number of publicly traded shares of the company by the share price. The S&P 500 index has achieved impressive returns – $1.00 invested in 1970 would have yielded a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.

How are companies chosen to be included in the S&P 500?

Companies are selected by committee, unlike some other indexes where they are included based on set rules. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be greater than or equal to $12.7 billion. Other criteria include liquidity, domicile, public float, sector, financial viability, length of time publicly traded, and representation of the industries in the economy of the United States. The nine largest companies in the index account for 27.8% of the market capitalization of the index.

How can I trade the S&P 500?

There are a number of ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFD) to place bets on the direction of the price. In addition, that can buy into Index, Mutual and Exchange Traded Funds (ETF) that track the price of the S&P 500. The most liquid of the ETFs is State Street Corporation’s SPY. The Chicago Mercantile Exchange (CME) offers futures contracts in the index and the Chicago Board of Options (CMOE) offers options as well as ETFs, inverse ETFs and leveraged ETFs.

What factors drive the S&P 500?

Many different factors drive the S&P 500 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500 as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.

Earnings of the week

Tuesday, June 20 - FedEx (FDX)

Wednesday, June 21 - KB Home (KBH), Winnebago (WGO)

Thursday, June 22 - Accenture (ACN), Darden Restaurants (DRI)

What they said about the S&P 500 – Mislav Matejka

A JPMorgan team of equity strategists headed by Mislav Matejka released a skeptical report on Monday concerning the broad market’s valuation. Noting that 2023’s rally has mostly been caused by a strong showing in large-cap tech stocks, the team wrote that most growth stocks appear overvalued when compared to high bond yields. Matejka and team recommend that investors steer clear of growth stocks at this point and lock up their gains in the healthcare, consumer staples and utilities sectors.

"If growth stalls in absolute terms, and cyclical rotation does not get a fundamental support, then the overall market could come under pressure in the second half [of 2023.]”

S&P 500 forecast

The S&P 500 has made gains for five straight weeks, but last Friday saw traders taking profits. Unless Powell comes out surprisingly dovish at his Capitol Hill testimony this week, the S&P 500 is due for a pullback. The Relative Strength Index shows a reading of 73 on the daily chart, and 70 is typically used as the cut-off threshold for an “overbought” stock or index. Every time that the index has entered overbought territory on the RSI in recent years, the S&P 500 launches into a sell-off that normally lasts several months.

Possible levels of support for the S&P 500 come in at the zone stretching from 4,100 to 4,200. This region worked as resistance for much of this spring, but it has also worked as support on several occasions in 2021 and 2022.

If the rally, however, continues to produce gains for the index, then expect the S&P 500 to retouch 4,500. This is a level that worked as resistance in April of last year. Another supply zone surrounds 4,600, a little higher up.

S&P 500 daily chart

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