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Last week, the S&P 500’s nine-week winning streak ended with all three major indexes falling.
On Monday, it seemed like the pain was over. But selling pressure continued today.
As I write this article, the S&P 500 is down 0.8%, the Nasdaq is down 1.7% – after briefly trimming losses of 3.5% – and the Dow is currently flat.
As I explained to my followers on a market podcast, the weakness was mostly related to profit taking in AI-related stocks. The truth is that the market was overbought after the surge we saw in chip, memory and AI infrastructure names.
Moreover, concerns are growing that persistent inflation may keep the Fed on its toes — or worse, lead to higher interest rates.
If that wasn’t enough to spook investors, tensions between the US and Iran flared again today. Hours after President Trump indicated peace talks were on the right track, he announced that the United States would respond to an Iranian attack on a US military helicopter.
This is the kind of headline that can turn a comfort spike into a quick sellout.
However, I want you to understand that the situation is much more contained than the headlines suggest. Ships are passing through the Strait of Hormuz with American escort, domestic oil production has increased significantly, and stocks are being filled. This bottleneck won’t be a long term problem, guys.
And let’s not forget that today’s headlines were a bright spot. Existing home sales rose by 3.2%, the strongest reading this year. Housing has been one of the weakest parts of our economy, so this is an encouraging sign.
The next big test for this market
Looking ahead, there’s a lot to be excited about this week.
Meanwhile, the IPO market is heating up dramatically: SpaceX is scheduled to go public on Friday, aiming to raise $80 billion at a $1.77 trillion valuation — the largest IPO in market history. After Monday’s close, the company behind ChatGPT, OpenAI, secretly filed IPO papers. This follows rival Anthropic, the company behind Cloud, which made the same move just a week ago.
Both companies could trade on Wall Street as soon as this fall.
But as exciting as it all is, this week’s inflation reports have more significance for market direction.
On Wednesday, we will release the Consumer Price Index (CPI). Economists expect the headline CPI to rise 0.5% in May and 4.2% over the past 12 months. The core CPI, which excludes food and energy, is expected to rise to 2.9% year-on-year, compared to 2.8% in the previous month.
Then on Thursday, we will get the Producer Price Index (PPI). Expectations are for the headline PPI to rise by 0.6% in May compared to 1.4% in April, while the core PPI is expected to rise by 0.4%.
The bottom line is, while the market is nervous about the technology trade, cooler-than-expected inflation readings could help calm investors — while hotter numbers could put more pressure on stocks and Treasury yields.
But what I want you to understand is that these fluctuations are normal. The market gets hit, bounces, pulls back, and then bounces again. Sometimes it retests the lows two or three times before the next stop higher.
That’s why I don’t chase headlines. I follow the data.
Now, the data tells me that the bears are getting this market wrong.
Why do bears get this wrong?
Now, not everyone is on the same page as me. A Bank of America strategist made headlines this week, warning that the market could fall 6% — arguing that the tech-heavy top half of the market would be impacted by the weaker bottom half.
I respectfully disagree with this. In fact, the latest backtest of Stock Grader data shows that market breadth and strength are improving.
This strategist makes a mean reversion argument that completely ignores fundamentals. Profits rose 29.3% last quarter. Analysts are forecasting growth of 21.5% for the full year – and these estimates are still being revised upward.
You won’t get a sustained 6% correction when earnings accelerate like this.
It is worth noting that even some of the most persistent bears on Wall Street are starting to emerge. One strategist who spent years telling investors to get out of stocks is becoming more positive. When bears start giving up, that tells you something.
Bottom line: I think we’re looking at 5% to 6% GDP growth next quarter, the housing sector is on the rise, and earnings momentum is healthy. The volatility we are seeing now is a normal part of any bull market, and is not a reason to abandon fundamentally outperforming stocks.
That’s why I continue to focus on data. Right now, the data tells me that this market has more room to run.
But folks, this is the market you’re in He owns Be selective.
Good stocks can bounce like fresh tennis balls. Bad stocks can fall like rocks.
So, before you make any moves in this market, I want you to check the short-term health of the stocks you already own. And I’ve been working on a brand new tool with my friends at Want Smith Which can help you do this…
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Simply type in any ticker symbol, and you’ll see whether the system currently views that stock as healthy, neutral, or at risk in the short term.
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sincerely,
Louis Navellier
editor, Market 360
