Market Warrants Caution Ahead of These Two Events

*A low volume, but potentially pivotal week ahead for an overbought stock market

*The S&P 500’s valuation is bumping up against peak P/E levels — here’s what we’re focusing on

*Friday’s July PCE data could sharpen rate-cut expectations

*Nvidia’s earnings are coming and why it needs to deliver a beat and raise quarter

We are staring down a funky week in the markets. On the one hand, the next few days are likely to be among the lowest volume ones we’ll see in the coming weeks ahead of the Labor Day holiday weekend. Fed Chair Powell’s Jackson Hole comments on Friday which confirmed an adjustment in Fed policy is coming have taken some of the pressure off, but the market will soon focus on how big of an adjustment could be coming in the next few weeks.

That question will likely bring some attention to today’s update for the Atlanta Fed’s GDPNow model, its first since the August 16 2.0% figure for the current quarter. Our thinking, however, is that is only part of the puzzle and we say this full well anticipating the raft of August data we’ll get next week and the week after.

That collective picture will set the tone for the increasingly likely September rate cut but also what the Fed is likely to signal in its policy statement and Powell’s tone during his September 18 presser. As we stand here today, we continue to see the market’s expectation, per the CME Fed Watch Tool, for 100 basis points in cuts to the fed funds rate before the end of this year as aggressive. Upcoming data, including this Friday’s July PCE price data, will tell us just how aggressive it may be.

We saw what Powell’s Jackson Hole comments did to the market, and it was certainly positive for the portfolio. Let’s remember, though, that the market was short-term overbought heading into that pop, and following it, the S&P 500 closed last week and at 23.2x expected 2024 EPS, a hair’s breadth from the 23.4x it peaked at several weeks ago. That figure was not just the peak for 2024, but barring the pandemic high of 27.1x, it was the highest since 2002’s 24.0x. While we could see the current market multiple bump up its 2024 high, the odds of it going much past are questionable.

In Friday’s Roundup, we shared that this means, for the market to move sustainably higher, we will need to see stronger-than-expected EPS growth in 2H 2024. In that Roundup, we discussed current factors that raise questions about those prospects and why the upcoming September investor conference season will be as important as what the Fed says and does on September 18.

If all this sounds like it’s time to be cautious, we would agree with you and that is the path we will be walking even as we continue to unearth fresh Bullpen candidates. If September’s reputation holds, we will want to be ready. Should we see the market push higher in the very near term, it may mean taking some additional portfolio chips off the table, so we have some additional firepower for when the time is right.

And with that in mind, we have quarterly results later this week from Nvidia NVDA. Given how widely-held Nvidia NVDA shares are, and because it is currently the third-largest holding in the S&P 500 and the Nasdaq Composite, its results and guidance will be another factor that determines where the market goes next.

Based on data points from Taiwan Semiconductor TSM, Microsoft MSFT and ServiceNow NOW about AI, and ramped data center spending from Big Tech, Nvidia’s results should soar. The risk is that, even if its guidance is good, will it be good enough for the market given where it currently resides? We’ve seen many companies deliver June quarter upside only to maintain their full-year guidance. For the shares to move much higher, Nvidia will need to deliver a beat a raise quarter following the more than 30% over the last 12 trading sessions.

We’ll have a technical look at them later today, and from there we’ll chart our next move.

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At the time of publication, TheStreet Pro Portfolio was long NVDA and MSFT.