S&P 500 Forecast: Expect debt ceiling talks to injure sentiment this week

The S&P 500 index could begin to feel the effects of the debt ceiling showdown in Washington this week. Now midway through May, US debt ceiling talks are less than three weeks away from the US Treasury’s chosen deadline of June 1. At that point, the Treasury will begin using extraordinary measures in order to continue making the federal government’s debt payments by delaying other payments in order to resist a default.

Besides debt ceiling talks held throughout the week, which may push equity sentiment in either direction, a few high-profile retailers will report earnings this week, including Walmart (WMT) and Home Depot (HD). Those quarterly announcements will mesh well with Tuesday’s April retail sales release to make the retail sector the overall focus of the stock market this week.

At the time of writing in Monday’s premarket, S&P 500 futures have advanced 0.3%, while NASDAQ 100 futures have gained 0.2%. 

S&P 500 News: Debt ceiling situation likely to hurt equities

Betting markets put the odds at about 15% that the federal government will commit a technical default (late payment) before the debt ceiling is lifted. This already occurred during the Obama administration when Congressional intransigence led to Standard & Poor’s lowering the US government’s credit rating. Even a technical default could lead to higher interest rates on Treasuries that would hurt the relative value of equities and thus the S&P 500.

A compromise that cuts spending and/or raises taxes would also likely be a net negative for the index however. The federal budget is currently running a large deficit that is acting as a shadow stimulus to the economy. A major cut to that spending level would likely lower future GDP and even corporate profits in the second half of the year. The only situation that would help the stock market would be a clean raise of the debt limit – which is currently stuck at $31.4 trillion.

Last Friday’s negotiations between President Biden and House Republicans were postponed to this week, so expect some market-moving headlines to emerge once those meetings take place. Additionally, US Treasury Secretary Janet Yellen is scheduled to give a talk at the Bank Policy Institute this week. The industry lobby will also feature CEO Jamie Dimon of JPMorgan and Citigroup CEO Jane Fraser.

April retail sales combines with major retailer results

The US Census Bureau will release April retail sales one hour before the market opens on Tuesday. Wall Street consensus for the MoM retail sales growth is 0.7%. This would be much better than March’s -0.6% decline, so a miss would likely lead to a sell-off in retail stocks.

Adding to the focus on retail, a number of the largest big box retailers are reporting their quarterly results this week. Home Depot arrives on Tuesday with analyst consensus calling for $3.80 in GAAP EPS on revenue of $38.37 billion in sales. Wednesday has Target (TGT) reporting with Wall Street expecting $1.86 in GAAP EPS on $25.31 billion in sales.

Then on Thursday, both Walmart and Alibaba (BABA) report. Wall Street consensus expects Walmart to earn $1.31 per share on revenue of $147.8 billion, while Alibaba is expected to report $1.36 in adjusted EPS on $30.19 billion in sales.

Besides that, smaller retailers like Ross Stores (ROST), Foot Locker (FL) and TJX Companies (TJX) will also report this week.

Earnings of the week

Monday, May 15 - Tower Semiconductor (TSEM)

Tuesday, May 16 - Baidu (BIDU), Home Depot (HD), Sea Limited (SE)

Wednesday, May 17 - Target (TGT), Cisco (CSCO), TJX Companies (TJX), Take-Two Interactive (TTWO)

Thursday, May 18 - Walmart (WMT), Alibaba (BABA), Applied Materials (AMAT), Farfetch (FTCH), Ross Stores (ROST)

Friday, May 19 - Foot Locker (FL), Deere & Co (DE)

S&P 500 quote: Michael Wilson

Michael Wilson, chief US equity strategist for Morgan Stanley, said the debt ceiling debate is likely to trigger major moves in the market.

"[Most market participants] believe it will ultimately get resolved, but not without some near-term volatility.”

S&P 500 forecast

The S&P 500 has already been whispering that a downturn is in the cards. Last week the index lost -0.3%, and the week before it was -0.8%. What has kept the S&P 500 afloat is that twice now – on April 26 and again on May 4 – strong support was seen at 4,050. That double bottom has kept many a trader’s hopes alive. 

SP 500 daily chart

The debt ceiling showdown, however, has the worrisome prospect of probably leading to some institutional selling. No one likes uncertainty, and the possibility of a technical default is extremely dangerous. The “sell in May and go away” saying is sensible now more than ever. 

A weekly close below 4,100 will certainly lead to more selling next week. And a break of recent support at 4,050 will set the S&P 500 on an escalator down to December’s support ledge at 3,800. All told, the market looks pessimistic. The Moving Average Convergence Divergence (MACD) indicator also crossed over bearishly at the end of April, so this downturn has been foreshadowed for weeks.