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Last week, the S&P 500’s nine-week winning streak came to an end as all three major indexes pulled back.
On Monday, it looked like the pain might be over. But that selling pressure continued today.
As I write this, the S&P 500 is down 0.8%, the NASDAQ dropped 1.7% – after briefly paring losses of as much as 3.5% – and the Dow is currently flat.
As I explained in a Special Market Podcast to my followers, the weakness has been mostly tied to profit-taking in AI-related stocks. The reality is the market was overbought after the big run we’ve seen in chip, memory and AI infrastructure names.
What’s more, concerns are rising that persistent inflation could keep the Federal Reserve on hold – or worse, force a rate hike.
If that weren’t enough to put investors on edge, U.S.-Iran tensions flared again today. Hours after President Trump suggested peace talks were on track, he announced the U.S. would respond to an Iranian attack on a U.S. military helicopter.
That’s the kind of headline that can turn a relief rally into a selloff fast.
That said, I want you to understand that the situation is more contained than the headlines suggest. Ships are getting through the Strait of Hormuz with U.S. escorts, domestic oil production has increased significantly, and inventories are being filled. This bottleneck is not going to be a long-term problem, folks.
And let’s not forget, buried in the headlines today was a bright spot. Existing home sales rose 3.2% – the strongest reading this year. Housing has been one of the weakest parts of our economy, so that’s an encouraging sign.
The Next Big Test for This Market
Looking ahead, there’s plenty to get excited about this week.
Meanwhile, the IPO market is heating up in a big way: SpaceX is set to go public Friday, aiming to raise $80 billion at a $1.77 trillion valuation – the largest IPO in market history. And after Monday’s close, the company behind ChatGPT, OpenAI, confidentially filed IPO paperwork. That follows rival Anthropic, the company behind Claude, which took the same step just a week earlier.
Both companies could be trading on Wall Street as soon as this fall.
But as exciting as all of that is, this week’s inflation reports matter more for the market’s direction.
On Wednesday, we’ll get the Consumer Price Index (CPI). Economists expect headline CPI to rise 0.5% in May and 4.2% over the past 12 months. Core CPI, which excludes food and energy, is expected to rise to 2.9% year-over-year, compared to 2.8% the prior month.
Then on Thursday, we’ll get the Producer Price Index (PPI). Expectations call for headline PPI to rise 0.6% in May compared to 1.4% in April, while core PPI is expected to increase 0.4%.
Bottom line, while the market is worried about the tech trade, cooler-than-expected inflation readings could help calm the investors – while hotter numbers could put more pressure on stocks and Treasury yields.
But what I want you to understand is that these oscillations are normal. The market gets hit, bounces, retracts, then bounces again. Sometimes it retests the lows two or three times before the next leg higher.
That’s why I don’t chase headlines. I follow the data.
And right now, the data tells me the bears are getting this market wrong.
Why the Bears Are Getting This Wrong
Now, not everyone is on the same page as me. A Bank of America strategist made headlines this week, warning that the market could fall 6% – arguing that the tech-heavy top half of the market will get dragged down by the weaker bottom half.
I respectfully disagree. In fact, my latest backtest of Stock Grader data shows that the breadth & power of the market are improving.
This strategist is making a mean reversion argument that completely ignores the fundamentals. Earnings grew 29.3% last quarter. Analysts are forecasting 21.5% growth for the full year – and those estimates are still being revised higher.
You don’t get a sustained 6% correction when earnings are accelerating like that.
Notably, even some of Wall Street’s most persistent bears are coming around. One strategist who spent years telling investors to get out of stocks has turned more positive. When the bears start capitulating, that tells you something.
The bottom line: I think we’re looking at 5% to 6% GDP growth next quarter, housing is picking up, and earnings momentum is intact. The oscillations we’re seeing now are a normal part of any bull market – not a reason to abandon fundamentally superior stocks.
That’s why I stay focused on the data. And right now, the data is telling me this market has more room to run.
But folks, this is a market where you have to be selective.
Good stocks can bounce like fresh tennis balls. Bad stocks can fall like rocks.
So, before you make any moves in this market, I want you to check the short-term health of the stocks you already own. And I’ve been working on a brand new tool with my friends over at TradeSmith that can help you do it…
Tomorrow at 10 a.m. Eastern, I’m hosting a special event where I’ll show you a groundbreaking new form of AI that takes the power of Stock Grader and uses it to generate investing signals with some of the highest upside potential that I’ve seen in my entire 47-year career.
You don’t have to be a sophisticated Wall Street “quant” or math whiz to understand it or use it.
And before the event, you can test-drive part of that system for free.
Just type in any ticker symbol, and you’ll see whether the system currently views that stock as healthy, neutral, or at risk in the short term.
Go here to register for tomorrow’s event and check your stocks now.
Sincerely,
Louis Navellier
Editor, Market 360
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