The equity markets struggled to stage a comeback in the past week as investors remain worried about macro-economic challenges impacting the fundamentals of companies. Most equity indices experienced a decline on Friday, closing a shortened four-day week with losses. In the week prior to Memorial Day, the S&ampP 500 surged by 6.5%.

In an interview with CNBC, the chief investment strategist at Charles Schwab, Liz Ann Sonders stated the late May surge in the stock market sets up the bourses for more selling going forward. According to Sonders, “The type of rally like we saw last week and some of what it contained looks a little more typical of bear market rallies.”

She added, “I still think you’re likely to get countertrend pops in some of the more speculative areas of the market. ... But I think very decidedly the low quality trade is in the rearview mirror. I think to do well in this environment you have to be value minded. Not value indexes, but valuation minded.”

The S&ampP 500 index slipped into bear market territory briefly last month during intra-day trading but is yet to close a session with a 20% decline from all-time highs.

 

Inflation is the key catalyst for stock prices

In the upcoming week, investors will be closely watching reports for the consumer price index and consumer sentiment, both of which are set to release on Friday. The CPI for May is forecast to be better than April with several experts believing inflation to have already peaked. The CPI reading for April stood at 8.3% with the number for May is forecast at 8.2%.

In May, the CPI will be impacted by higher energy prices as well as food costs and red hot used car prices. Even if inflation in May is lower than the numbers in April, prices will have to decelerate quickly from their peak for the equity markets to stabilize.

Technical traders expect the S&ampP 500 to hold support at 4,073 and then at 3,810. The S&ampP 500 Index slumped by 1.2% last week to close trading at 4,108.

Most companies are wrestling with headwinds related to rising prices as well as higher interest rates. Throw in factors that include geo-political tensions, supply chain disruptions, and higher commodity prices and you can see why stocks have been volatile in 2022.

Elon Musk, the CEO of Tesla (NASDAQ: TSLA) reportedly told executives that he has a “super bad feeling” about the economy which might lead to a 10% cut in the company’s workforce. TSLA stock fell 9% on June 3 and is currently trading 43% below all-time highs.

 

Microsoft and Salesforce lowered revenue guidance

In the last week, tech heavyweights such as Microsoft (NASDAQ: MSFT) and Salesforce (NYSE: CRM) lowered their revenue guidance for the current fiscal year due to a strong U.S. dollar. In case earnings and profit margin estimates remain bleak, investors should brace for another round of sell-off in the following months.

Sonders further explained, “We had the valuation re-rating by virtue of the weakness in the market, but we haven’t yet seen the weakness in forward expectations in earnings.”

Another metric that Sanders is watching is the put/call ratio which is used as a contrarian indicator. It measures the number of put-to-call options. Basically, put options expect stock prices to decline and a high ratio indicates a bearish market sentiment.

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