Morning Wrap: ASX 200 to fall, S&P 500 logs seventh straight week of gains

The S&P 500 logged its seventh straight week of gains, market analysts are increasingly worried about overbought market conditions, New York Fed President Williams pushes back against Powell's dovish policy statements, European Central Banks are united on seeing rate cuts later than market expectations and Goldman Sachs is one of the first major brokers to lift its S&P 500 target.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 finished around breakeven (Source: TradingView)

MARKETS

Note: Tomorrow will mark the last Morning Wrap of the year. It will return on Monday, 8 January 2024.

• S&P 500 breakeven, finished between session low of -0.3% and high of 0.13% 

• Growing scrutiny about how stocks are looking increasingly stretched into year-end

• Goldman Sachs says S&P 500 nearing most overbought level in more than a decade

• Bespoke Investment says ten of the eleven S&P sectors are trading in overbought territory, with energy the only exception

• Bullish focus points for the week: No Powell pushback against aggressive market easing expectations, rally broadening into laggards like small caps, money market funds market first outflow in eight weeks, disinflation traction and soft-landing momentum 

• Bearish focus points for the week: Fed Williams noted the central bank was not really talking about rate cuts, no signs the ECB and BoE pivots, stocks appearing increasingly overbought, pickup in US corporate layoffs, EV softness and China growth concerns 

• Markets outpace central banks as rate cut bets fuel 'everything rally' (Reuters)

• Pound jumps as Bank of England warns of no rate cuts(Telegraph)

STOCKS

• Costco earnings boosted by strong demand for consumables (Reuters)

• Lennar beats on key metrics but margins under scrutiny (Reuters)

CENTRAL BANKS

• NY Fed President Williams pushes back against policy pivot (CNBC)

• Fed pivot piles pressure on Europe's central banks to shift stance (FT)

• ECB largely united on seeing rate cuts later than market bets (Bloomberg)

• ECB's Muller says market bets in first half of 2024 rate cuts premature (Bloomberg)

• BoJ expected to leave policy unchanged but may provide more details on looming NIRP exit (FT)

GEOPOLITICS

• US tells Israel to lower intensity of Gaza war (FT)

• EU to extend trade truce with US until after presidential election (FT)

• UK's Rishi Sunak clashes with Israeli ambassador over two-state solution (Telegraph)

• EU fails to agree €50B Ukraine funding package (FT)

• EU to begin membership negotiations with Ukraine and Moldova (Bloomberg)

CHINA

• PBOC makes record net liquidity injection via MLF (Bloomberg)

• Mixed China activity data fails to ease weak growth concerns (Bloomberg)

• China property market weakness deepens (Reuters)

• Shanghai and Beijing loosen home purchase restrictions (SCMP)

• China's deepening property crisis and stock market slump dents demand for REITs (Bloomberg)

ECONOMY

• US manufacturing output increases in November, underlying trends soft (Reuters)

• Eurozone PMIs weaken in December (Reuters)

• Japan manufacturing activity shrinks most in 10 months (Reuters)

• UK consumer confidence rises to 3-month high (FT)

• New Zealand's recession is a warning for the rest of world (AFR)

The First S&P 500 Price Target Revision

Goldman Sachs is one of the first major brokers to lift its S&P 500 target, up to 5,100 from 5,000. Here are the key takeaways:

• "Decelerating inflation and Fed easing will keep real yields low and support a P/E multiple greater than 19x."

• "Since late October, S&P 500 has surged by 15% and Russell 2000 has soared by 23% as real rates plummeted from 2.5% to 1.7%."

• "Our prior year-end 2024 forecast assumed yields of 2.23% and a P/E of 18x."

• "Upside risk exists to our above-consensus EPS estimate of 5% growth. The improved macro outlook implies a more conductive environment for bringing IPOs to market."

• "Resilient growth and falling rates should benefit stocks with weaker balance sheets, particuarly those that are sensitive to economic growth."

Sectors to Watch

The S&P 500 is starting to stall after a massive run up, which is not necessarily a bad thing. The market needs to digest the recent move and demonstrate a calm pullback.

Materials: Resource stocks like BHP, Rio Tinto and Fortescue are all pretty extended after the recent iron ore price moves. I just found this Bloomberg article rather interesting. It notes how China's steel production is set for its first annual gain in three years as economic concerns are prioritised over the need to cut emissions.

Uranium: In my opinion, uranium is one of the most choppy sectors. The Global X Uranium ETF rallied 3.4% last Thursday to a fresh 2-year high and then sold off 2.5% last Friday. This could see some negative follow through for local names.

A pullback for several sectors: A lot of our overnight ETFs pullback around 1% after rallying 15-50% off late October lows. This included Gold Miners, Homebuilders and Biotech.

ASX corporate actions occurring today:

• Trading ex-div: None

• Dividends paid: Orica (ORI) – $0.25, Fisher & Paykel (FPH) – $0.17, Invex Therapeutics (IXC) – $0.18

• Listing: None

Economic calendar (AEDT):

No major economic announcements.