In recent weeks, markets have been forced to contend with a swath of weak economic data reports in the US, and investors may have started to question whether rallies in the S&P 500 are sustainable. In the current context, bad economic news has been spun by analysts as a market positive, based on the suggestion that deteriorating report figures will inspire the Federal Reserve to maintain a dovish policy stance. As a result, long-term price trends in the S&P 500 have held onto a bullish tone.
However, there is mounting evidence that the technical bull rally is trading on shaky ground and the fundamental catalyst for downside pressure on the benchmark index could come as a result of weakening earnings expectations. As we move into the third-quarter earnings season, the upcoming reports are now expected to show broad weakness in corporate profitability. Analyst surveys have indicated potential declines of roughly 4.1% on an annualized basis, with many concerns directed at the materials, energy, and real estate sectors.
If we do actually see declines in earnings within the S&P 500 during the upcoming reporting period, it would indicate the third straight quarter of decline in profitability. This would be the first time a negative trend like this has been visible since the middle of 2016. Of course, earnings reports offer a viewpoint that is very much in the “rearview mirror,” so it will also be important to take an assessment of the guidance figures that are released during these upcoming reporting periods.
Remember, this was a key issue during the last earnings reporting season and most of the evidence suggests that is likely to happen again. Global trade tensions continue to influence the ways analysts view future growth potential and this is particularly true or multinational organizations with blue-chip stock expectations.
From a technical perspective, we can see several signs that the S&P 500 is becoming vulnerable to the possibilities of downside reversals. The most important technical development in this regard is the slowing momentum rate that has become visible in the benchmark stock index. The rallies that have unfolded in the S&P 500 since December of last year have not been confirmed by the external analysis framework that is now visible in the medium-term momentum trends. Fundamental traders can review our in-depth Momentum Trading Tutorial to gain a better understanding of how momentum changes.
S&P 500 Chart Analysis: AskTraders.com
Currently, forward P/E ratio figures stand at roughly 16.5x, which is far higher than the average of 14.8x that has been in place over the last decade. Growing political uncertainty in the US, the possibility that Brexit will end in a “no-deal” outcome, and continued global trade war tensions have started to make their presences felt on the technical chart readings.
Now that we are seeing a clear slowdown in long-term trend momentum in the S&P 500, investors are being given a clear warning signal that suggests it might be time to start considering booking profits on long positions. S&P 500 traders must maintain watch over the result in the upcoming earnings season while negative expectations remain apparent. These results will be the best indicator of true underlying strength (or weakness) in this uncertain business climate. Have the price charts started to show us a visual representation of a shaky foundation in the S&P 500? It’s likely we will have a clearer answer to this question in the weeks ahead.
Ask Traders offers actionable investment analysis to beat the benchmarks and limit risk in global finance.
___
Equities Contributor: Ask Traders
Source: Equities News
Read Next
