Earnings To Bring Tailwinds For S&P 500, But Recovery Unlikely Until Fed Pivots

• Earnings season may help to give the S&P 500 a much-needed boost from oversold levels.
• However,Gade ranking forex dealers monetary policy will continue to be the biggest head for the equity market
• Tighter monetary policy will stand in the way of any long-term rally

down about 25%. While the market is again at an oversold point, earnings season is about to kick off, with the potential to deliver a short-term rebound that may be welcomed but is unlikely to last.

growth. Because over the same time, as real GDP has fallen, nominal GDP has continued to rise, and sales estimates are just following nominal GDP higher. So as companies report results this quarter, it would not be surprising to see numbers come in stronger than estimates, especially on the revenue side of the equation.

This could give investors the hopes and dreams that all will be ok, and it could even rally the equity market for a couple of weeks. But that will change the path of monetary policy, and by then, the Fed will be on course to raise rates to between 4.25% and 4.50%, and potentially higher following today's hotter-than-expected report and keep them there for some time.

Alternatives

Additionally, stocks are already expensive compared to bonds, and any rally in equity prices will make them more expensive. Unfortunately, for the first time in more than a decade, there is an alternative to stocks, and that makes stocks less attractive.

The spread between the S&P 500 dividend yield and the has risen to more than 2%. That is the widest the spread has been since 2010 and equivalent to periods not seen since the mid-2000s.

S&P 500 PE Ratio Is Still Too High 

The problem is that the last time the spread between the dividend yield and the 10-year was this wide was in the mid-2000s, and the PE ratio of the S&P 500 traded at lower valuations. Over that period, the PE ratio traded as low as 14, versus today's valuation of 15.7. It is not much lower, but it suggests the potential for the S&P 500 to still head lower from its current levels.

Additionally, if the 10-year rate should continue to rise, it is only likely to widen that spread further, which means that the S&P 500 dividend yield would need to keep pace with a rising 10-year. As the dividend yield falls, it pushes the value of the S&P 500 down.

At this point, the equity market can get that very much-needed relief rally as earnings approach or come in better than feared. It seems unlikely that a long-term uptrend in the equity market isn't likely to start until the Fed’s monetary tightening cycle is over.

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