S&P 500 Wobbles On Another Revived Fundamental Risk – Bulls Aren’t Unflappable

S&P 500 Wobbles On Another Revived Fundamental Risk – Bulls Aren’t Unflappable

The larger bullish drive across the financial market since the reversal of the reciprocal tariffs six months ago remains intact. However, with yet another revived thematic threat floated – bad bank loans – what are the limits of complacency?

Talking Points:

• While the larger bull trend of the past six months remains intact for risk benchmarks like the major equity indices, recognition of fundamental cracks is growing
• Key markets to monitor with intersection on multiple thematic threats includes: Gold; US Treasury yields; the Nasdaq 100 and crude oil
• Top event risk this week has the potential to dredge up systemic interests including growth (China GDP); stretched capital markets (earnings) and interest rate speculation (US CPI)

Yet Another Fundamental Threat from the Past Revived…And Discounted

This past week, yet another fundamental risk from the past was resuscitated to briefly shake the market's otherwise passive, default climb. Back in March 2023, the collapse of Silicon Valley Bank (SVB) triggered a broader bank run in the regional bank space that necessitated government intervention and led to a limited risk aversion swoon across the financial system. The acute phase of the episode lasted a few weeks and the lingering uncertainty a few months after that. However, the broader S&P 500 was only unsettled for a few days. News this past week that regional banks Western Alliance and Zions were confronted with losses on bad loans seemed to trigger memories of two-and-a-half years ago, but the reaction was significantly truncated with a mere day's tumble and contained spread in risk aversion sentiment.

Chart of S&P 500 Overlaid with SPDR S&P Regional Bank ETF (Weekly)

  

Source: TradingView, Standard & Poor’s 

With both banks due to report their earnings next week - along with a number of other regional banks - this matter may not be completely behind us. However, the shortened half-life of fear this flash caused is not dissimilar to how sentiment has bowled through other systemic themes that have led to greater periods of instability in the past. An ongoing US government shutdown, revived US-China trade war and period of high uncertainty in US monetary policy (and data) have all been absorbed and seemingly put behind us. However the capacity for complacency and risk exposure is not infinite. The more of these matters that compound and linger, the deeper the well of concern to draw from when sentiment eventually rolls over. Remember, markets rise and fall.

Google Trends Worldwide News Search Interest

 

Source: Google Trends

Event Risk Covering Serious but Disengaged Themes

Looking out over the coming week’s scheduled docket, there is event risk that carries the capacity of stirring deeper fundamental waters to potentially restore momentum – either bullish or bearish. In terms of the density of top-tier listings, the week looks to be book-ended at the start and end of the week. And, for themes, event risk looks to pose a proximal threat to economic activity (China GDP and October PMIs); the concept of stretched market valuations mentioned by the IMF and Bank of England among others (via earnings) and FOMC rate speculation (US CPI). There is perhaps some further adjacency to themes like AI value, the US government shutdown and consequence from trade wars; but unscheduled headlines would be more capable of rousing these matters than anything on the docket.

Calendar of Top Global Macro Event Risk

  

Source: John Kicklighter

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The World’s Second Largest Economy

The first theme to be tested this week will be the fundamental health of major economies – with perhaps some potential extension of expectations to the global economy. Monday offers China’s reading of Q3 GDP. This is not the first large economy to report its official growth update, but it will be the most consequential to the global picture and it will drum up interest for subsequent major economies that will provide their own update through the coming weeks including: the Eurozone; United States; United Kingdom and Japan among others.

Economist expectations for China’s annual growth rate this past quarter projects a moderated tempo to 4.9 percent from the previous period’s 5.2 percent clip. Last week, the IMF held its 2025 and 2026 forecasts for Chinese growth unchanged at 4.8 and 4.2 percent respectively. Normally, government data is eyed with skepticism, but the moderation of trend in recent years and the release of September data sets at the same time warrant a closer look. Further to the theme of growth, don’t overlook the Friday release of the major economies’ October PMIs – with impact potential that can be turned up or down depending on the reaction to China’s official report.

Chart of China, US, Eurozone and Japan Year-Over-Year GDP (Quarterly)

  

Source: TradingView, China NBS, US BEA, Eurostat, Japan Cabinet Office 

Earnings: What Stock Has the Broader Speculative Reins?

A second core theme to weigh over the coming week is the continuation of US earnings. After the IMF’s GFSR (Global Financial Stability Report) released with a message of caution around a sense of ‘complacency’ and valuations back at ‘stretched levels’, the backdrop of this previous source of bullish interest may represent a catalyst for either direction. Most of the Magnificent 7 are not due to release until a little further out, but Tesla will be one of the major market cap tech giants that does report Wednesday after the close.

As sizable as the company is (7th largest US market capitalization), its correlation to the baseline Nasdaq 100 is not particularly strong on a rolling, 20-day basis (0.5). Then again, IBM with perhaps closer ties to recent AI investment trends is only slightly higher and the once-FAANG giant Netflix carries a negative relationship. We could also draw on other themes from the corporate reportings we are due such as consumer spending (Coca Cola), fiscal spending issues with the shutdown (RTX, Lockheed Martin) or regional bank loan risks (Western Alliance, Zions).

Chart of Nasdaq 100 Overlaid with Tesla and 20-Day Correlation

Source: TradingView, NASDAQ 

Will the Fed Have September’s CPI Data to Weigh for its Rate Decision?

Finally, at the end of the week, there will be a fundamental light house cutting through competing themes from data like the October PMIs, updated US consumer confidence report, Hong Kong Q4 business sentiment and more. The September update of the US Consumer Price Index (CPI) is expected to cross the wires after its week-and-a-half delay. With the government shutdown, data agencies like the Bureau of Labor Statistics have not been collecting and distributing their data. However, this particular reading is due to go ahead – with the public spending costs its includes – owing to the need to by the Social Security Administration to meet its deadlines for benefits payments.

Inflation from a macro perspective has been a flashpoint with a recent turn higher being labeled a tentative result of tariff pass through while President Trump has stated just as recently as Friday that there is ‘no inflation’. The Fed, which has said its position on monetary policy remains ‘data dependent’ will no doubt draw on the data since September’s meeting resulted in the first rate cut of 2025 and considering we still haven’t seen September’s labor data – the other side of the dual mandate.

Chart of US CPI Year Over Year and Unemployment Rate (Monthly)

  

Source: Federal Reserve Economic Database, Bureau of Labor Statistics 

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--- Written by John Kicklighter, Global Head of Content