The extension of the stock market rally is raising optimism that a soft landing for the economy is increasingly a possibility despite the Federal Reserve’s aggressive rate hikes. That leads some on Wall Street to believe stock prices will continue to rise this year.
However, one trader says he “doesn’t buy it”.
“The expansion is the result of an insane surge in mega-caps rather than an actual expansion in the economy,” said Gareth Soloway, chief market strategist at Inthemoneystocks.com, a technical analysis platform.
“If you subtract the 7 stocks from the S&P 500 (^GSPC), Apples (^AAPL), Google (^GOOG), Microsoft (^MSFT), Amazon (^AMZN), etc., the S&P 500 is still only up about 4%,” Soloway added. He believes investors are now chasing stocks that haven’t run away like the mega-cap names in hopes they can catch up.
The Nasdaq (^IXIC) had its best first half in four decades, up about 34% year-to-date. The S&P 500 is up 18%. Even the Dow Jones Industrial Average (^DJI) hit a 52-week high this week.
Market bulls are pointing to other sectors such as the Dow Transportation (^DJT) as a sign of a healthier economy and a continued uptrend in stocks.
However, according to Soloway, disappointing factory orders, weak industrial production, slower-than-expected retail sales and tighter bank lending standards all point to a weaker economic environment.
“It’s this dream that everything’s going to be okay — I just don’t see it,” Soloway said.
He believes the markets are overbought and a correction is imminent.
June retail sales were cooler than Wall Street had anticipated. Portal/Mike Blake
“I think in general the Nasdaq is probably going to be down about 10% from the gains it’s had, and I think the S&P — because it’s cushioned by financials starting to do better and some other areas — is likely to be down about 5-6%,” Soloway said.
He cautions that given the pace of activity this year, the declines will not be large, but could likely worsen if a full recession occurs.
The story goes on
“Once we get into next year and things get bad and the Fed doesn’t come to the rescue, I’m scared of breaking last year’s October lows,” Soloway said, forecasting a 70 percent chance it will happen.
His thesis is at odds with increasingly optimistic prospects. As Yahoo Finance contributor Sam Ro recently pointed out, Wall Street strategists have revised upwards their year-end targets for the S&P 500.
Calls for a soft landing of the economy despite the Federal Reserve’s aggressive rate hikes are becoming more frequent.
“We have maintained our inconsensual call for a soft landing since early last year,” wrote Ellen Zentner, economist at Morgan Stanley, in a note to investors this week. “The data has continued to move in our direction, our view has only firmed and a soft landing has become the consensus.”
Meanwhile, Goldman Sachs recently lowered its forecast for the probability of a recession next year to 20% from a previous 25%.
Ines is Senior Economic Reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre
Click here for the latest stock market news and in-depth analysis, including stock moving events
Read the latest financial and business news from Yahoo Finance