Strong earnings unable to lift S&P 500 from “no man’s land”; What’s next?

The S&P 500 has remained range-bound in recent weeks, unable to post considerable gains even amid a strong earnings season, as a plethora of risks ranging from trade to rising interest rates continue to pose headwinds for equity markets. Alongside political considerations, these themes will probably stay at the forefront in the coming months, with price action likely to remain headline-driven and market sentiment vulnerable to sudden shifts.

“Going nowhere fast” is a rather accurate description of how the S&P 500 has behaved in the past few weeks. The earnings season has nearly passed, and while approximately 80% of the companies in the index reported earnings above analyst expectations, it has continued to move largely sideways, unable to break above the range it has established in recent months. This has been the case even despite US companies announcing the second-largest amount of share buybacks on record during the latest earnings period.

To be fair, one could look at the situation from a different lens and argue markets have remained surprisingly resilient – in that they have only moved sideways instead of dropping – in the face of a plethora of discouraging developments. Oil prices have risen rapidly, which theoretically squeezes consumers’ incomes and is considered a negative for stocks overall – despite boosting energy sector equities. Meanwhile, US Treasury yields have risen further to fresh multi-year highs, making bonds more appealing and adding some “competition” for stocks. And although most headlines point to progress in the US-China trade negotiations, some occasional harsh rhetoric from the US administration jolts investors back to reality, reminding them that the trade war narrative probably still has some legs to run.

Perhaps more importantly, price action is increasingly becoming a by-product of incoming media headlines – which are inherently difficult to predict – with broader market themes frequently being turned on their head by a single announcement. In such an environment, where sentiment can change almost daily, technical indicators can be particularly useful in helping one navigate through the noise and see the bigger picture. For example, following the early-February plunge, the S&P 500 has been posting higher lows on the daily chart, signaling that the selling pressure may be gradually weakening. Moreover, it managed to hold above its 200-day moving average in the face of trade, geopolitical, and interest rate risks, suggesting that all these woes were not enough for equity investors to “jump ship”.

Looking at future fundamental drivers of price action, the trade theme is likely to stay front and center moving forward, especially following recent signals from the US administration that it is considering imposing tariffs on imported cars; a measure that would single out Germany and Japan, who export large numbers of automobiles to the US. If officially announced, such tariffs could weigh on broader market sentiment, on speculation for a tit-for-tat retaliation by the likes of the EU and Japan.

That said, they may still prove somewhat beneficial for the shares of US automakers, who would now be shielded from foreign competition in the US. Specifically, US companies like General Motors and Ford may stand to gain in the short-run, while conversely, foreign manufacturers such as BMW, Volkswagen, Daimler, Toyota, and Mazda, may be negatively impacted. Note that most large German and Japanese automakers generate a considerable fraction of their revenues in the US.

Besides trade, interest rate considerations will likely remain a relevant theme. While this correlation does not always hold true, higher bond yields are generally considered negative for stocks, as investors seeking higher returns turn to bonds instead of stocks in an environment of rising yields. The yields on 10-year Treasuries abruptly surged to seven-year highs last week, and although they have pulled back somewhat lately, their movements are worth keeping a close eye on.

Finally, while markets have been focusing on Italian politics, the other major narrative that could gain traction during the summer are the midterm US elections, scheduled for November. All 435 seats of the House will be contested, as well as 33/100 seats in the Senate. With very few exceptions over the past decades, the party of the sitting President nearly always loses seats in Congress during midterm elections. The President’s political capital and ability to shape policy are consequently depleted, as bipartisan deals are needed for bills to pass Congress. The Democrats currently need just 23 more seats to take back control of the House and hence, uncertainty around such an outcome may be yet another headwind for equities in the coming months.

Technically, looking at the S&P, advances in the index may encounter immediate resistance near 2,742, the peak from May 14. An upside break of that zone could open the way for the March 15 top, at 2,763, before the bulls eye the 2,802 territory, defined by the high of March 13.

On the flipside, and in case of declines in the index, initial support may be found near 2,702, the May 15 low. If the bears manage to cross below it, declines could stall at 2,655, the low from May 8. Lower still, buy orders may be found near the 200-day moving average at 2,632, with a potential downside break of that hurdle opening the way for the 2,595 area, marked by the May 3 low.