(Oct 28): Equity bulls are lining up to wager the S&P 500 will surge past 7,000 now that it looks as if a seasonal bout of volatility has passed.
The index powered to a record 6,875 on Monday, buoyed by positive signs on trade, expectations for an interest rate cut and strong corporate earnings. With that macro backdrop in place, bulls are pointing to other factors that can take the index past the psychologically important 7,000 level.
Fund flows show retail and institutional investors pouring into the market, while technical analyses show little resistance ahead of the round-number milestone. In a seasonal quirk, the current week stands out as the best for stocks over the past 75 years.
“There’s no shortage of catalysts to push risk higher,” Michael Romano, the head of hedge fund equity derivative sales at UBS Securities, wrote in a note to clients on Sunday. “What was once a blue-sky 7,100 into year end is quickly turning into the base case as the market pulls forward next year’s upside.”
The optimism will get a stiff test this week, as five of the Magnificent Seven tech behemoths report results on Wednesday and Thursday. A handful of major central bank decisions are also due, from the likes of Japan and Europe, in addition to the US Federal Reserve.
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If stocks can weather that stretch, seasonal factors look beneficial. The final weeks of the year tend to favour risk assets. In data back to 1985, the Nasdaq 100 has averaged an 8.5% gain from Oct 20 through year end, while the S&P 500 returned 4.2% on average, according to Goldman Sachs Group Inc’s trading desk.
More immediately, the last week of October stands out as the single best to be long equities, according to UBS data based on the S&P 500’s rolling one-week average returns since 1950.
From a technical standpoint, analysts see further upside. The next resistance level for the S&P 500 sits near 7,000, just 1.8% above Monday’s close, said John Kolovos, the chief technical strategist of Macro Risk Advisors.
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“That will be an important milestone and if the index pushes through, 7,500-7,700 becomes the next target,” he said.
Alexander Altmann, Barclays plc’s global head of equities tactical strategies, sees the S&P 500 hitting 7,250 by December’s close, citing the index’s average absolute annual move of 23% over the past five years.
The so-called flow of funds also looks favourable as major investor groups are adding fuel to the rally.
Retail investors, which account for 22% of trading volume in US stocks, have been net buyers in 23 of the past 27 weeks, according to Citadel Securities.
Corporate buybacks that had been paused in the runup to earnings season are allowed again, with Goldman traders noting that the fourth quarter is historically active for repurchases.
Even hedge funds have turned into net buyers of US stocks after two weeks of heavy selling, snapping up equities as Friday’s muted inflation data bolstered bets on rate cuts.
That’s not to say there are no risks facing a stock market that’s rallied 38% from April lows, pushing valuations to levels usually seen in times of bubbles.
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While corporate results have been excellent so far, Microsoft Corp, Alphabet Inc, Meta Platforms Inc, Amazon.com Inc and Apple Inc — representing about a quarter of the S&P 500 by market capitalisation — are yet to report results.
“If there’s any sign of disappointment, or questions about artificial intelligence spending not paying off, I expect investors will be quick to punish them,” said Dave Mazza, the chief executive officer of Roundhill Financial Inc.
On the other hand, tidy beats could give bulls their round number in just a couple days, he said.
“That could be the spark that keeps this rally burning and the S&P 500 can hit 7,000 this week.”
Uploaded by Tham Yek Lee
