After a strong rally that brought the market close to its all-time highs, U.S. stocks faced a setback on Tuesday, marking a pause in what could have been the S&P 500’s ninth consecutive day of gains—a streak not seen in two decades.
This recent surge in the market was a stark reversal from the “extreme negative momentum” observed during the early August selloff. As investor sentiment improved, strong inflows and strategic positioning fueled a rapid market recovery. According to Goldman Sachs’ trading desk, trend-following investors, often referred to as “momo guys” or momentum traders, have ceased being a drag on the market, contributing instead to its recent strength.
The bullish momentum was further supported by favorable macroeconomic data, with Citigroup strategists led by Chris Montagu noting that nearly $16 billion in new long positions were added to S&P 500 futures. This influx pushed positioning to increasingly stretched levels. Additionally, Bank of America reported that their clients were net buyers of U.S. equities for the second consecutive week, signaling robust investor confidence.
Kenny Polcari of SlateStone Wealth highlighted that momentum traders are currently driving the market, although he cautioned that trading volumes have decreased as the month draws to a close. “The recent rally may be an exaggeration due to lower volumes, but we’ll have to see how things unfold,” Polcari remarked. Similarly, Matt Maley at Miller Tabak suggested that a brief market pause could be beneficial, emphasizing that “no market moves in a straight line.”
On Tuesday, the S&P 500 slipped below 5,600, with Nvidia Corp.—which had surged nearly 25% over six days—leading the decline among major tech stocks. Bank of America also saw its shares fall following the sale of over $550 million worth of shares by Warren Buffett’s Berkshire Hathaway. Meanwhile, Lowe’s Cos. revised its full-year guidance downward, and while Netflix Inc. hit a record high, Palo Alto Networks Inc. rose on a bullish outlook and an enhanced buyback program.
Treasury yields also fell, with the 10-year yield dropping five basis points to 3.82%. The Canadian dollar, or loonie, lagged behind most major currencies as Canadian inflation slowed, reinforcing expectations of rate cuts. Oil prices remained steady as traders kept a close watch on cease-fire negotiations in the Gaza conflict.
Dan Wantrobski of Janney Montgomery Scott expressed a cautious near-term optimism about the stock market but remains wary of a potential larger corrective phase that could emerge between August and October. “The strong price momentum and rapid reversals we’ve seen recently are characteristic of modern markets,” said Jason Draho at UBS Global Wealth Management. He attributes this to the significant influence of the Federal Reserve, macroeconomic uncertainty, herd behavior among investors, and the growing reliance on index-linked products for portfolio management.
Much of the recent rally has also been driven by speculation that the Federal Reserve may soon signal a move toward cutting interest rates. With Fed Chairman Jerome Powell’s upcoming speech at Jackson Hole and crucial U.S. payroll revisions on the horizon, investors are keenly focused on the potential for rate cuts.
Payroll Revisions and Fed Outlook
Economists from Goldman Sachs and Wells Fargo anticipate that Wednesday’s preliminary benchmark revisions could show that payroll growth for the year through March was weaker by at least 600,000 jobs than previously estimated. JPMorgan forecasts a smaller revision of around 360,000, but Goldman suggests the number could be as high as one million.
Dennis DeBusschere of 22V Research noted that the recent decline in rates is likely driven by expectations of these payroll revisions. “A significant downward revision could increase the likelihood of more aggressive rate cuts being signaled at Jackson Hole,” he explained, adding that such a revision doesn’t necessarily raise recession risks.
Anthony Saglimbene of Ameriprise believes that ongoing progress on inflation, stable labor market conditions, and strong consumer trends could give the Fed the confidence to begin cutting rates as early as September. “Whether it’s a 25 or 50-basis point cut isn’t the main concern,” Saglimbene stated. “What matters is that the economic data suggests the Fed has room to start easing monetary policy, laying the groundwork for a potential soft landing.”
Analysis and Market Impact
For investors, the recent market dynamics offer both opportunities and challenges. The momentum-driven rally, while impressive, carries the risk of sharp corrections, especially in the face of macroeconomic uncertainties. The potential for rate cuts could provide support to the market, but investors should remain cautious of volatility, particularly as key economic data and Fed decisions loom on the horizon.
The focus on payroll revisions and their implications for Fed policy adds another layer of complexity. If the revisions show significant job losses, it could justify a more accommodative stance from the Fed, potentially fueling further market gains. However, this could also indicate underlying economic weaknesses that might temper long-term growth prospects.
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