S&P claws back half of bear market losses

S&P CLAWS BACK HALF OF BEAR MARKET LOSSES (1605 EDT/2005 GMT)

Wall Street bounded into the late summer weekend with a solid rally on Friday, as markets had few catalysts to stand in the way of risk-on sentiment inspired by another round of upbeat economic data.

With the day's advance, the S&P 500 has reclaimed just over half of the ground lost to the big bad bear.

The S&P ended above the 4,231 level, meaning the benchmark index has retraced more than half of the losses it suffered since its January high on a closing basis, which was later confirmed to be the beginning of a bear market.

All three of the major U.S. indexes ended the session sharply higher and notched weekly gains, with the S&P and the Nasdaq enjoying their longest week-over-week winning streaks since October-November.

The rising tide of sentiment lifted nearly every boat, as all 11 major sectors of the S&P 500 advanced, and nine enjoyed gains of more than 1%.

A better-than-expected August Consumer Sentiment reading and a welcome cooldown in import/export prices capped a week of rosy indicators. Together they suggest that while economy is robust, inflation is cooling, and the Fed's recent spate of aggressive interest rate hikes to control it might be shorter-lived than anticipated.

The phrase "soft landing" - the notion that Powell & Co can tame inflation without triggering a recession - has returned to many analysts' vocabularies.

The market currently sees a 57.5% chance of a 50 basis point interest rate hike at the conclusion of the central bank's September policy meeting, up from 32% a week ago, according to CME's Fed watch tool.

Next week market participants will have plenty to chew on, with earnings results due from Walmart WMT, Target TGT, Home Depot HD, Lowe's LOW and a host of other retailers. Cisco CSCO and Deere DE will also have their say.

On the economic front, retail sales, housing data, industrial production and regional manufacturing reports are expected.

Here's your closing snapshot:

(Stephen Culp)

*****

EARNINGS SEASON GALLOPS DOWN FINAL STRETCH, RETAILERS AT THE GATE (1341 EDT/1741 GMT)

With second-quarter earnings season nearly a wrap, investors are heaving a collective sigh of relief.

About 91% of the companies in the S&P 500 have had their moment in the spotlight, and of those, 78% beat consensus expectations, according to I/B/E/S data from Refinitiv.

Analysts now believe that, on aggregate, the S&P 500 enjoyed year-over-year earnings growth of 9.7% during the April to June period, significantly stronger than the 5.6% predicted at quarter-end, per Refinitiv.

While more than a few companies provided dour outlooks amid signs of softening consumer demand, those sentiments were largely baked-in to expectations.

On a sector level, energy companies SPN clearly led the winners, posting nearly 300% annual EPS surge on the strength of soaring crude prices CL1!, while industrials (.SPLCRI) and materials S5MATR placed and showed at 32.0% and 17.4%, respectively.

Financials SPF, weighed by dealmaking and investment banking slowdowns and increased loss provisions, were the biggest losers, showing a 19.1% year-over-year earnings decline. Consumer discretionary S5COND and communication services S5TELS also joined the losers' club, notching annual respective declines of 12.8% and 11.9%.

And the fat lady isn't singing yet, she's merely warming up.

Next week a host of heavy-hitting retailers including Home Depot HD and rival Lowe's LOW, along with big box retailers Walmart WMT and Target TGT will take their turn at bat during a week in which the Commerce Department releases its closely watched retail sales data for July.

Looking ahead to third quarter results, of the 73 companies to have issued pre-announcements, 31 have been positive versus 36 negative, resulting in a negative/positive ratio of 1.2, far more pessimistic than the year-ago quarter but not as dire as Q2.

Refinitiv currently shows a consensus estimate of 5.8% annual earnings growth for the July-September quarter, a significant drop from the 11.1% Q3 earnings growth predicted on July 1.

The table below, courtesy of Refinitiv, shows how third quarter earnings estimates have evolved since October 1, 2021 (click to enlarge):

(Stephen Culp)

*****

BULLS AND BEARS HIT LEVELS NOT SEEN SINCE MARCH - AAII (1215 EDT/1615 GMT)

Individual investor optimism and pessimism over the short-term direction of the U.S. stock market both hit levels not seen since March in the latest American Association of Individual Investors Sentiment Survey (AAII). With this, "neutral" sentiment edged up.

AAII reported that bullish sentiment, or expectations that stock prices will rise over the next six months, rose 1.6 percentage points to 32.2%. Optimism was last higher on March 24, 2022 (32.8%). Despite recent increases, bullish sentiment remains below its historical average of 38.0% for the 38th consecutive week.

Bearish sentiment, or expectations that stock prices will fall over the next six months, dipped 2.2 percentage points to 36.7%. Pessimism was last lower on March 31, 2022 (27.5%). Bearish sentiment is above its historical average of 30.5% for the 37th time out of the past 38 weeks.

Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, added 0.6 percentage points to 31.2%. Neutral sentiment is below its historical average of 31.5% for the 14th time in 16 weeks.

With these changes, the bull-bear spread narrowed to -4.5% from -8.3% last week :

AAII said that "both bullish and bearish sentiment as well as the bull-bear spread are currently within their typical ranges."

(Terence Gabriel)

*****

TGIF DATA: SUNNIER CONSUMER SENTIMENT, COOLER IMPORT PRICES (1104 EDT/1504 GMT)

Data released on Friday stuck to the script written by upbeat indicators throughout the week, providing signs of waning inflation and economic resiliency, renewing hopes that a soft landing can still be maneuvered by the Federal Reserve.

The mood of the American consumer has brightened this month.

The University of Michigan's initial take on August consumer sentiment (USUMSP=ECI) gained 3.6 points to deliver a rosier-than-expected reading of 55.1.

A jump in near-term expectations drove the gain, bounding 7.6 to 54.9, offsetting a 2.6 point drop in the "current conditions" component.

"All components of the expectations index improved this month, particularly among low and middle income consumers for whom inflation is particularly salient," writes Joanne Hsu, director of UMich's Surveys of Consumers. "Still, the share of consumers blaming inflation for eroding their living standards remained near 48%."

The graphic below compares current situation index with six-month expectations:

Of course what consumers say and what they do are two different things, and market participants will get a glimpse of the latter in next week's Retail Sales report, which is expected to decelerate to a nominal monthly gain of 0.2% for July, a 0.8 percentage-point deceleration.

Despite the uptick, the consumer outlook remains below the level it plunged to in the immediate aftermath of pandemic shutdowns. Even so, the saving rate - often seen as a barometer of consumer anxiety - has dropped while outstanding credit card balances have blown past pre-COVID levels.

This suggests the consumer, who contributes about 70% of U.S. GDP, is burning through cash and whipping out their plastic in order to cope with decades-hot inflation:

Inflation remains bugaboo number one. "The share of consumers blaming inflation for eroding their living standards remained near 48%," Hsu adds.

Inflation expectations were a mixed bag, edging down in the near term to 5.0% from 5.2%, but longer-term expectations edging up 0.1 percentage point to an even 3%.

This chart shows were consumers expect inflation to be one and five years down the road:

Speaking of inflation - and when are we not? - a report from the Labor Department showed the price of goods imported to the United States (USIMP=ECI) contracted more than expected in July, dropping 1.4% from June.

Compared with last year, import prices decelerated by an impressive 1.9 percentage points to a still-scorching 8.8%.

Line-by-line, the largest declines came courtesy of petroleum and industrial supplies, which plunged by 6.8% and 4.7%, respectively.

Combined with a sharper than anticipated 3.3% drop in export prices, the report suggests the combined cooldown of world economies and right-sizing of the supply chain could be returning the demand/supply imbalance to something resembling equanimity.

"With a synchronized slowdown in global growth factoring into lower oil prices, we expect import price inflation to remain on a gradual downtrend through the end of the year, barring any unforeseen supply shocks," says Mahir Rasheed, U.S. economist at Oxford Economics. "Rising interest rates and a more modest growth path for the economy will also support slower growth in import prices, especially as domestic demand eases and falls into a healthier balance with supply."

Investors were headed into the weekend in a buying mood.

All three major U.S. stock indexes are on track for daily and weekly gains, with the S&P and the Nasdaq poised to notch their longest weekly winning streaks since October.

(Stephen Culp)

*****

WALL STREET GAINS ON SIGNS OF COOLER DAYS AHEAD (0950 EDT/1350 GMT)

Wall Street opened higher on Friday as fresh signs that the inflation heatwave is starting to cool had market participants heading into the late summer weekend in a buying mood.

The S&P and the Nasdaq are charting a course for their fourth consecutive weekly gains, their longest winning streaks since October.

The Labor Department released three sets of indicators this week, all of which appeared to forecast cooler inflation days ahead. CPI and PPI were followed on Friday with import prices, which contracted by a consensus-beating 1.4% from July and decelerated to 8.8% year-over-year.

The market has now set a 63.5% likelihood of a 50 basis point interest rate hike from the Fed come September, an easier pill for stocks to swallow than the third straight 75 bp increase expected prior to this week's data, according to CME Fed funds futures.

The U.S. House of Representatives is expected to send the $430 billion Inflation Reduction Act to the White House to be signed into law by President Biden. The bill is dedicated to fighting climate change, lower prescription drug costs and closing corporate tax loopholes.

Pfizer PFE was providing a solid lift to the S&P 500 after announcing encouraging results from its phase 3 study of its 20-Valent Pneumococcal Conjugate Vaccine in infants. The drugmaker's shares are last up 2.1%

Aside from the University of Michigan's advance take on August consumer sentiment due at the top of the hour, very few market market-moving catalysts stand between investors and the weekend.

Here's your opening snapshot:

(Stephen Culp)

*****

WHO LET THE DROUGHT OUT? (0909 EDT/1309 GMT)

An end to Russian gas exports to Europe might push euro zone inflation up to 6% next year, and spark a contraction in euro zone GDP of 1%-2% in 2023, Capital Economics believes.

With the disruption of Russian energy supplies, extreme weather conditions, falling water levels on the river Rhine in Germany, a drought in parts of England, Norway warning it may limit exports due to low water levels in reservoirs... Europe's energy markets have seen better days.

"The heatwave is coming on top of a long period of dry weather across much of Europe that has seen river flows fall to historic lows... The war in Ukraine has already created extraordinary stress in energy markets and now the drought is threatening the ability of Germany to use alternatives to Russian gas," said Steve Clayton, fund manager at Hargreaves Landsdown.

Additionally, recent economic data has raised alarm bells about the euro zone economy. "There's little evidence that shortages of components or labour are easing, and it could take a while before underlying price pressures in the euro-zone fade," says Andrew Kenningham, chief Europe economist at Capital Economics.

Below is a chart from Capital Economics suggesting that “reopening inflation” is still taking place.

"The increase in furnishings and household equipment inflation shows that price pressures are broad-based," Kenningham writes.

But the one silver lining is that the energy crisis should ease by Q2 next year, Kenningham says, because demand for gas falls as the summer approaches. "By the following winter 2023-2024, Europe should have increased its capacity to process and transport LNG."

"We see little reason to expect a significant revision to the preliminary flash estimate that euro zone GDP grew by 0.7% quarter-over-quarter in Q1."

Next week will be quiet on the data front, with only the second estimate of Q2 GDP and employment data, plus final HICP numbers to look forward to.

(Anisha Sircar)

*****

S&P 500 INDEX: HALF THE FALL IN A THIRD OF THE TIME (0900 EDT/1300 GMT)

The S&P 500 index SPX continues to battle a number of significant chart hurdles in the form of congestion and retracement levels - click here:

From its June 17 intraday low, the SPX rallied as much as 17% over 37 trading days into Thursday's 4,257.91 high. With this push, the benchmark index flirted with the 50% retracement of its January-to-June, 114-trading day, bear-market slide at 4,227.75:

Thus, the SPX has now retraced as much as 52.6% of its entire 2022 collapse, in about a third of the time it took for that decline to play out.

The SPX failed to hold its gains on Thursday. The index reversed to close slightly lower at 4,207.27. It therefore ended back below the 50% level, but just slightly above the 23.6% Fibonacci retracement of the entire March 2020-January 2022 advance at 4,198.70.

CME S&P 500 e-mini futures ES1! are gaining in premarket trade, but traders will be watching to see in what direction the SPX breaks on a closing basis out of the 4,198.70-4,227.75 zone to potentially signal the next short-term thrust.

On the upside, the late-April high at 4,308.45, the descending 200-day moving average (DMA), which ended Thursday at 4,330, and the 61.8% Fibonacci retracement of the 2022 bear at 4,367.19 would be the next significant resistance zone.

On the downside, Wednesday's gap requires a fall to 4,137.30 for a fill, and the 100-DMA ended Thursday at 4,109. A break below the August 2 low (4,079.81) can suggest downside pressure will intensify again.

(Terence Gabriel)

*****

FOR FRIDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE: