S&P 500 Forecast: Index starts week on right foot, reaches new 2023 high

The S&P 500 index launched itself to a new high for the year on Monday. The index reached 4,623, which was just above the earlier annual high of 4,607 from July 27. 

The S&P 500 index gained 0.39% on Monday, a little below the Dow Jones Industrial Average and about double the NASDAQ Composite's performance. Oracle (ORCL) earnings will be released after Monday's close.

Longer-dated US Treasury yields rose about 1% early Monday, but later in the session the yield picture mostly declined. The US Treasury auctioned off 3-month and 6-month bills and 3-year and 10-year bonds, which led bond yields to reduce late in the day.

Investors will largely focus on November CPI data and how the Federal Reserve (Fed) on Wednesday discusses it. No one expects a change in rates at the Wednesday meeting, but there is uncertainty about the Fed’s Dot Plot heading into 2024.

S&P 500 News: November CPI forecast has inflation largely stable

Besides rising Treasury yields, another obstacle holding down stock market gains is the general consensus on Wall Street that November US CPI, out on Tuesday, will remain largely flat with the previous reading. 

For instance, monthly headline inflation is expected to tick higher from 0% to 0.1%, while the annual reading is projected to decline from 3.2% to 3.1%. 

Core inflation is in much the same boat. The monthly Core reading for November is expected to rise from 0.2% to 0.3%, while annually Core inflation is expected to remain flat at 4%. 

This is not great news for investors since the Fed’s target is 2% annual Core inflation. Despite approximately 18 months of inflation declining, the central bank needs Core CPI to be cut in half to reach its goal. Investors have largely been sanguine about the issue so far, noting that inflation is overall moving in the right direction. But the central bank seems to confer more significance to boldly meeting its goal.

Like usual, a lower reading will help investors reap the harvest as stock prices will shoot higher. A higher CPI reading, on the other hand, will lead to a sell-off. This is because it will lead to forecasts for interest rates remaining higher for a longer period of time.

Wednesday FOMC meeting hinges on Dot Plot

Every quarter, the central bank releases an updated Dot Plot, wherein Fed governors predict future Fed interest rate decisions over the following couple of years. The release is relevant in that it helps stock pickers determine how tight or loose monetary policy will be well into the future.

The Dot Plot graph is found inside the Summary of Economic Projections (SEP) report that hasn’t been released since September. The September SEP startled Fed watchers by reducing the 2024 interest rates cuts from 1 percentage point to just fifty basis points. 

The reason that the Dot Plot and SEP are more important on Wednesday is that the market is near unanimous in its outlook that the Fed will keep the fed funds rate at its current range of 5.25% to 5.5%. In the September SEP, the consensus called for one more rate hike before 2023 ended, but with inflation declining since then, most economists think this unlikely.

If the Dot Plot shows that the same 50 basis points is all the cuts that 2024 is likely to see, expect the S&P 500 to sell off. But a move back to 75 basis points or 100 being lopped off the fed funds rate one year from now will see the optimism spread like a PG&E-caused wildfire. 

In addition to the Federal Open Market Committee (FOMC) meeting, Wednesday will deliver an updated Producer Price Index, this time for November. Core PPI is expected to decline from 2.4% annually to 2.3%.

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

Monday, December 11 - Oracle (ORCL)

Tuesday, December 12 - Johnson Controls International (JCI)

Wednesday, December 13 - Adobe (ADBE), ABM Industries (ABM)

Thursday, December 14 - Costco (COST), Jabil (JBL), Lennar (LEN)

Friday, December 15 - Darden Restaurants (DRI)

What they said about the market – Mark Kolanovic

JPMorgan’s Mark Kolanovic released a client note last Friday that explained the predicament that investors face heading into 2024. Ostensibly, risk assets need to decline in order to push the Fed to cut rates. But with indices already nearing all-time highs at the end of 2023, the central bank has little reason to help those risk assets by cutting rates in the near time. This leads Kolanovic to predict a rather dismal performance for the market next year, with equities underperforming bonds by 5% in an optimistic scenario.

“This is a catch-22 situation, in which risk assets can’t have a sustainable rally at this level of monetary restriction, and there will likely be no decisive easing unless risky assets correct (or inflation declines due to, for example, weaker demand, thus hurting corporate profits).”

S&P 500 forecast

Reaching a new annual high in December bodes well for the index going into a new year. However, note that the S&P 500 has been moving mostly sideways of late after stringing together its fastest end to a correction in November in half a century. 

Bulls have two more targets that arrive in quick succession. First, the 4,637 level stems from a range high in March 2022. Above there is the 4,800 resistance point from late December of 2021 and the first few days of January 2022. 

It would be apropos for the S&P 500 to retest all-time highs almost exactly two years since its long-term downtrend was initiated. However, note that momentum is waning and the Moving Average Convergence Divergence (MACD) indicator has already crossed over in a bearish fashion.

S&P 500 daily chart