Stock market has reached a crossroads: back to records?

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• The US central bank is eager to lower its policy interest rate.
• At the large tech companies, not only does the AI ​​hype continue to support the prices, but share buyback programs are also doing their job.
• After the stock market correction in April, the S&P 500 index has now reached an important crossroads, according to stock market experts Michael Nabarro and Gökhan Erem.

ANALYSIS – The earnings season on the stock exchange is still in full swing and this sometimes causes significant price movements for individual shares. So it rose Philips share on Monday in Amsterdam by almost 27 percent, but builder BAM lost a good 13 percent on Thursday. In the US, heavyweight Apple added almost 6 percent on Friday, but coffee chain Starbucks, for example, lost a good 16 percent on Tuesday.

Eyes were also on the US central bank’s interest rate decision, with particular attention focused on the press conference by Federal Reserve Chairman Jerome Powell

The US policy rate remained unchanged as expected, in short, because inflation is simply still too high and too persistent. The Federal Reserve will go tinker with the pace in which the mountain of purchased bond loans on the central bank’s balance sheet is reduced.

The rate at which the Fed’s bond holdings are reduced will slow from $60 billion per month to $25 billion per month. The reduction of the central bank’s debt holdings has a tightening monetary effect, because the dollars that the Fed receives during repayment are taken out of circulation. If the central bank reduces the pace of the reduction, this will therefore have a less strong monetary tightening effect.

In our view, these are the first signs that the money tap is slowly being turned on again. What was also striking in Powell’s explanation of the interest rate decision was that he indicated that the central bank’s preference is to lower the policy rate as soon as possible.

Powell stated that a sharply slowing labor market could also be a reason to lower interest rates. In other words, either a slowing labor market or falling inflation could be a reason for the Federal Reserve to take action.

The US labor market is (finally) showing cracks

In as if Powell had a crystal ball: Friday was the first time in a long time that there was a disappointing official event course report. In April, the US added 175,000 jobs, far fewer than economists expected and the slowest job growth since October 2023.

The graph below shows the difference between the actual jobs figure and economists’ expectations on a monthly basis, with a significant negative surprise in April for the first time since 2021.

Bron: Bloomberg

Yet one month of disappointing labor market figures is not enough to prompt the central bank to take action. Only if there are two or three more such setbacks and American unemployment rises well above 4 percent, it will be a different story.

For the Federal Reserve, it is to be hoped that if the economy deteriorates, inflation will also cool down further, otherwise we will get stagflation and the central bank will be in a difficult position.

A scenario of stagflation cannot be completely ruled out, if you look at the extent to which growth figures for the American economy and inflation respectively deviate from expectations. The graph below shows that inflation data (green line) has recently been higher than expected, while economic growth data has been lower than expected (red line).

Powell seems to be betting that inflation data will ultimately turn out better than expected, but that remains difficult to predict. In our view, the incoming data paints a somewhat less rosy picture than the American government would like.

Tech giants: Apple and Amazon

In our contribution from last week we took a closer look at the share price of the Magnificent 7, the large tech companies on the American stock exchange. This week, two members of that club, Apple and Amazon, released their quarterly figures. It turned out that in addition to AI developments, the role of share buyback programs also remains a crucial factor, as we have previously emphasized.

Apple’s figures were a nice confirmation of the importance of share buyback programs as a foundation for the price. Apple namely announced to buy back its own shares for no less than 110 billion dollars, which corresponds to roughly 4.5 percent of all outstanding shares.

Although Apple’s turnover fell again in the first quarter of this year due to the decline in sales of iPhones and Macbooks, the profit and turnover figures were still slightly better than expected.

Last week, regarding the technical price picture, they wrote that Apple shares had entered a sideways trend channel this year and would be back on the radar above roughly $180 per share.

And voilà, in the graph below you can see that investors responded very enthusiastically to the figures and the announced share buyback program.

By clearing the $180 barrier, from a technical perspective a move towards the recent records seems most likely and perhaps more after that. This has changed our view from neutral to positive, with the first price target being a record high around $200

Then Amazon. This tech giant exceeded all expectations, but is not yet doing anything in the field of share buybacks. Perhaps due to the significant investments the company has made in the development of AI technology, but also in the field of parcel delivery. So made Amazon recently known that the company not only sends more packages, but that it also gets them to their destination significantly faster.

Last week we already indicated that Amazon shares are a hold until proven otherwise. We see no reason to change this vision for the time being. In the chart below you can see that the share is on track to test the record levels. If these are cracked, higher prices seem likely.

US S&P 500 is heading towards an important crossroads

Finally, we will take a look at the broader stock market picture. Below you see the broad S&P 500 index, where we have taken the graph of the future. The S&P is still in a correction phase, but the price is approaching an important crossroads.

If the first horizontal red line and also the declining trend line (shown as a dotted line) are broken significantly upwards, the correction phase appears to be over and we can look for higher prices and perhaps further tighten the records.

As long as the S&P 500 does not fall below roughly 4,950 points, the prospects are good. If you like our previous suggestion If you have followed up to buy a protective option on this index above the 5,200 point limit, then it will make little difference to you and you will always maintain an annual profit of 6 percent or more.

We take into account that the effect of companies’ share buyback programs will take effect, interest rates will eventually fall and the central bank’s money tap will slowly open again. As a result, share prices are expected to receive a strong tailwind again.

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Michael NabarroChartered Market Technician (CMT), Gokhan Erem, also CMT, are independent investment specialists who have both worked in the financial sector for more than 25 years. With thorough knowledge and extensive experience, they serve professional and private investors based on their methodically substantiated, active investment method.

This column contains opinions and findings of the authors. The financial values ​​mentioned in this letter may form part of the authors’ investments as well as their relationships.

This column is not intended as advice in any form and serves as non-personalized information about the financial markets.