The Midway Point of The Year: What is next for the stock market?

Stock indexes are coming off their first winning week in over a month even as economic and geopolitical storm clouds remain little changed. While bulls want to believe this is an early sign that stock prices may be close to finding a bottom, others caution that portfolio rebalancing could be having an outsized influence on markets right now.

The midway point of the year

This week brings the end of the month as well as the end of the second quarter on Thursday, June 30, which will also mark the midway point of the year. Considering the dramatic shift in stock prices during Q2 along with the relatively low trading volume that has set in, this "rebalancing period" is expected to be particularly active and likewise have a stronger than normal impact on market direction.

Some insiders credit portfolio rebalancing toward the end of Q1 for a short-lived rally during the last week of March. For reference, the S&P 500 is still about -700 points lower since the peak of that rally, so there could still be more room to upside as the money continues to move and reposition into quarter-end.

Data to watch

This week, investors have a ton of key data to digest that will touch on a broad range of economic sectors as well as provide critical updates on inflation. The PCE Prices Index due on Thursday is by far this week's highlight with bulls anxious to see any signs that prices are starting to moderate.

Fed Chair Jerome Powell made it clear in comments last week that the central bank needs to see "substantial evidence" that inflation is coming down before they will consider slowing down the current policy tightening path. Headline PCE Prices is expected to see a pretty big rise due to the surge in May gas prices. The core rate, which strips out food and energy, is expected to hold steady or move down slightly. The Fed typically prefers "core" inflation gauges but has indicated that it may rely more heavily on headline numbers, at least temporarily, due to the heavy influence that gas and food prices have on consumer and business sentiment.

Results on Friday for the University of Michigan's Consumer Sentiment survey showed that inflation expectations have moved down a bit but overall sentiment fell to a new all-time record low. This has investors growing more concerned that a stiff gain in the headline rate will pressure the Fed into raising rates even faster and higher than planned, and possibly looking at other ways to pump the brakes on the economy.

Some on Wall Street believe the economy has already slowed substantially or may even be in a recession, so the idea that the Fed wants to slow slow things down even further remains a pretty big stumbling block for many bulls. Economists are closely tracking the manufacturing sector for early warning signs of bigger trouble.

The more closely-followed ISM Manufacturing Index on Friday will provide slightly more up-to-date data, capturing manufacturing activity and inflation through early June. The final estimate of Q1 GDP is due out on Wednesday and could fan recession worries if the read is lowered from the previous estimate for a decline of -1.5%.

Don't forget, traders and investors will also be positioning ahead of the upcoming extended July 4th holiday weekend. The market will more than likely thin out ahead of the holiday and create the possibility of increased volatility.