US stock surge: AI mania and easing inflation set stage for strong Q3

US stock indices fittingly ended Q2 on a solid note, as softer-than-expected inflation data bought the finishing line for the Fed’s tightening cycle into view.

The PCE Price index eased to 3.8% YoY vs a downwardly revised 4.3% in April - the lowest reading since April 2021. The Feds preferred measure of inflation, core PCE, eased to 4.6% YoY compared to market expectations of 4.7%.

Apple's $3 trillion market cap and unwavering AI craze

At a stock level, Apple added 2.3% to $193.97 as it became the first company in the world with a market cap of more than $US3 trillion. Nvidia added 3.6% to $423.02, shaping for a test of its all-time $439.90 high as AI mania continues unabated.

The two points above on easing inflation and the pursuit of US mega tech have been the key drivers of US equity market strength during the first half of 2023, along with resilient US economic data.

What are the expectations for Q3 2023?

As we have noted in recent months, AI technology is still too early to disappoint, which suggests the AI bubble is some way from deflating. Headline inflation at 4% in May can ease further into the low 3’s in the coming months due to base effects before hitting any structural speedbumps.

Providing the economic data broadly remains resilient, a significant setback other than from a black swan event, as we almost saw in Russia two weeks ago, appears unlikely during the seasonally strong month of July. Attention now turns to ISM manufacturing data due for release at midnight AEST tonight.

What is expected for ISM manufacturing?

In May, the ISM manufacturing PMI fell to 46.9 from 47.1 in April, recording a seventh month of contraction. ISM’s forward-looking sub-index new orders fell to 42.6 from 45.7. In more positive news, the survey’s prices paid measure dropped to 44.2 from 53.2.

For June, the market is looking for a modest bounce to 47.2.

S&P 500 technical analysis

In our last update, we outlined some potential support levels where a correction in the S&P 500 might find support into month end. Unfortunately, the correction fell fractionally short of the 4325 level we had targeted before racing away to cycle highs.

Given the likelihood of seasonal strength over the next few weeks, we expect the rally to continue towards 4500. A move above 4500 would then open the way for the rally to extend towards a strong layer of resistance 4600/40 (Feb and March 2022 highs).

S&P 500 daily chart

Nasdaq technical analysis

The pullback from the recent 15,475 high was also shallower than expected before the Nasdaq reversed higher to eye a layer of horizontal resistance at 15,265/85 (from the June high and the April 2022 high). While below here, there remains the possibility of another leg lower to 14,700 to complete the correction from the 15,475 high.

However, if the Nasdaq does break above 15,265/85, the next layer of resistance is not until 15,550 (from a series of lows in late 2021), before the November 2021 16764 bull market high.

Nasdaq daily chart

Dow Jones technical analysis

No change - the December 34,712 high remains the last band of resistance preventing the Dow Jones from setting up a test of the 35,492 high (from April 2022) before a run at the all-time 36,952 high.

Until that occurs, the Dow Jones will likely continue to flounder in the shadows of the S&P 500 and the Nasdaq.

On the downside, the Dow Jones is expected to continue to find good support, initially at 33,500 and then from the 200-day moving average, currently at 32,914.

Dow Jones daily chart

1. _{TradingView: the figures stated are as of July 03, 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.}