Report by James Ooi/uSMART Market Strategist

Summary: In the article, analysts believe that the US stock market may experience a relatively calm week, but investors still need to pay attention to to the possibility of a downgrade in the US sovereign credit rating. The market rally this year has lacked breadth, and bond traders are skeptical about the optimistic sentiment in the stock market. However, underperforming sectors like healthcare, energy, and industrials have started to catch up recently, potentially driving the S&P 500 higher. The Federal Reserve's stance seems slightly less hawkish, and while the latest employment data may keep rates unchanged in June, there's a 53% chance of a rate hike in July. With limited short-term upside potential and high valuations, investors are advised to exercise caution in the US stock market.

About James：

James Ooi/ uSMART Market Strategist

Over 13 years of experience in buy-side and sell-side of capital markets

Former Fund Manager of renowned asset management firm

Focus on fundamental analysis and macro-outlook for US & Singapore markets

SGX Academy trainer

This Week’s Market Outlook

This week's significant economic data in the United States includes the release of the ISM Services PMI on Monday, as well as the Unemployment Claims report scheduled for Thursday. Due to the lack of major economic data, the US equity market may have a relatively quiet week.

After President Biden signed the debt ceiling bill to avert a first-ever US default, the US debt crisis was temporarily alleviated. However, investors still need to pay attention to the possibility of a downgrade in the US sovereign credit rating. Fitch Ratings, a leading provider of credit ratings, stated on Friday that they may still downgrade the U.S.’s credit rating.

Looking back at 2011 (Figure 1), both parties in the United States went through a series of struggles over the debt ceiling issue. Although they eventually reached an agreement, the Standard & Poor's decision to put the US sovereign credit rating on negative watch and subsequently downgraded it from AAA to AA+ resulted in a nearly 18% drop in the S&P 500 index.

Figure 1: S&P 500 during the 2011 debt ceiling drama

Source: uSMART, Tradingview

The S&P 500 is currently near its yearly high; however, only 43% of stocks within the S&P 500 are currently trading above their 50-day moving average. This indicates that the year-to-date rally lacks market breadth (Figure 2).

Figure 2: S&P 500 Stocks Above 50-Day Average

HYG (iShares iBoxx High Yield Corporate Bond ETF) typically moves in tandem with the S&P 500 (Figure 3). However, HYG has not followed the S&P 500 in creating higher highs this year. This suggests that credit traders are still skeptical of the stock traders' optimism and are not fully convinced by the upward trend.

Figure 3: S&P 500 vs iShares iBoxx $ High Yield Corporate Bond ETF

Source: uSMART, Tradingview

Some underperforming sectors, such as healthcare, energy, and industrial sectors, have recently started to catch up in terms of returns (Figure 4). If funds flow into other sectors, the S&P 500 has the potential to rise further. The S&P 500 index has delivered a return of 2.25% month-to-date. However, in June 2022, due to seasonality, the S&P 500 index experienced an 8% decline.

Figure 4: S&P 500 Monthly Return

Source: uSMART, Bloomberg, 5 June 2023

Conclusion

The S&P 500 and Nasdaq-100 have returned 12.13% and 33.59% year-to-date, respectively.

In May, the non-farm payroll reached 339,000, exceeding expectations of 190,000. However, the unemployment rate stood at 3.7%, higher than the expected 3.5%. Recently, the Federal Reserve appears slightly less hawkish, and we believe that the recent employment data is just soft enough for the Fed to justify keeping interest rates unchanged in June. However, according to CME FedWatch (Figure 5), there is approximately a 53% probability of another rate hike in July.

Figure 5: CME Fedwatch

Source: CME Fedwatch

There may be limited room for further upside in the US equity market, especially considering the relatively high valuations of many individual stocks. Therefore, we still urge investors to adopt a relatively cautious approach towards the US stock market.

Currently, there are several high-quality companies, such as Apple, Amazon, Visa, Tesla, Costco, and Microsoft, that continue to demonstrate strong long-term EPSgrowth potential. Investors may consider gradually establishing long-term positions in these companies. Additionally, investors can also explore ETFs like SPY, QQQ, and SUSA to capture some market returns.

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