Wall Street: S&P 500 surges above 2022 highs; eyes on core PCE inflation, key earnings

After a choppy opening three weeks of 2024, the S&P 500 showed its hand on Friday night, surging above the January 2022 4818 bull market high.

Precisely two years in the making, and with a 28% pullback in between, the push to new highs was supported by the tech sector buoyed by Taiwan semiconductors' better-than-expected earnings report and a broker upgrade for Apple.

A giddy mix of data within the University of Michigan's consumer sentiment survey also helped fuel the move. Consumer sentiment in January soared to 78.8 from 69.7 in December, the largest two-month increase since the recession of 1991 ended. Notably, inflation expectations for the year ahead fell to 2.9%, the lowest since 2020 from 3.1%.

This week, the drivers of US equity markets will be earnings reports from tech giants Netflix, Tesla, and Intel Corp, along with Johnson and Johnson, Procter and Gamble, Visa and American Express. The key economic events will be Flash PMIs for January, Q4 Advanced GDP, the Fed's preferred measure of inflation, and the Core PCE price index for December. The Fed speakers' blackout period has commenced before the Fed's January meeting.

What is expected from the core PCE inflation report (Saturday, January 27th at 12.30 am AEST)?

Two months ago, annual headline PCE inflation eased to 2.6% from 2.9% prior. The Fed’s preferred measure of inflation, core PCE, cooled to 3.2% YoY, the lowest level since mid-2021, from 3.4% prior.

In December, headline PCE is expected to remain stable at 2.6% YoY and core PCE inflation is expected to fall to 3% YoY. On a six-month annualised basis, core PCE will remain at close to 2%. At 2%, monetary policy is too tight and will likely see the Fed cut rates several times in 2024.

Headline PCE price index chart

S&P 500 technical analysis

After a strong rally for the S&P 500 into the end of 2023, we started the New Year in a more cautious/neutral frame of mind.

While we would not be fighting Friday night's break higher, given the risk the rally overshoots, we remain of the view that the S&P 500 is in the final stages (Wave V) of its rally from the October 2023 low and note again the bearish RSI divergence. Bearish RSI divergence occurs when prices make new highs, but the RSI fails to make a new high.

As such, we remain patient, waiting for a pullback to develop in the coming weeks in the order of 5-8% - a pullback we will be looking to buy.

S&P 500 daily chart

Nasdaq technical analysis

After a strong rally for Nasdaq into the end of 2023, we started the new year in a more cautious/neutral frame of mind.

While we would not be fighting Friday night's rip higher, we remain of the view that the Nasdaq is in the final stages (Wave V) of its rally from the October 2023 low and note again the bearish RSI divergence. Bearish RSI divergence occurs when prices make new highs, but the RSI fails to make a new high.

As such, we remain patient, waiting for a pullback to develop in the coming weeks in the order of 5-10% - a pullback we will be looking to buy.

Nasdaq daily chart

• _{Source: TradingView. The figures stated are as of 22 January 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}