S&P 500 IndexGearing up for the worst half-year performance since 1970 set the stage for summer uncertainty and volatility, but analysts believe a massive rebalancing might underpin a month-end rally in U.S. stocks.
As fund managers adjust their holdings at the end of the quarter and expectations for a rate hike by the Federal Reserve cool, the S&P closed 3.06% in the red on Friday, its biggest gain since May 2020, with the S&P up 6.45% for the week , ending the three-week decline in a row, and may continue to rebound in the coming week.
JPMorgan analyst Marko Kolanovic said in a report on Friday,Next week’s rebalancing is important as stocks have fallen sharply over the past month, quarter and half year.
The rebalancing mechanism is to rebalance the investment institution’s investment portfolio once. During the investment process, the proportion of the investment portfolio will change with market fluctuations. This change will cause the original investment setting to deviate.
Kolanovic estimates that U.S. stocks might surge 7% in the coming week, considering only the bullish factor of rebalancing. With the S&P down regarding 13.7% in the second quarter and as much as 18% so far this year, fund managers will have to increase their holdings of equities to restore asset allocation levels.
Recent trends suggest that rebalancing is good for the bulls, for example, near the end of the first quarter, the S&P fell regarding 10%, and the result was a big 7% rebound in the last week of the first quarter. The same thing happened in May, the S&P fell regarding 10%. After 10%, it recovered by around 7% in the last week of May.
“Most importantly, the stock market is oversold, fund managers’ cash balances are at record levels, and the recent market shorting is the highest since 2008,” Kolanovic emphasized.
However, rebalancing is not the only catalyst for the rise of US stocks. JPMorgan analyst Andrew Tyler reminded that to explore whether this round of rebound has supporting momentum, investors also need to pay attention to the US core personal consumption expenditure (PCE) price index released on June 30, This is the Fed’s preferred inflation measure.
Strategists caution that any rebound might be a prelude to a mid-July sell-off once earnings season beginsand CFRA data show that the S&P fell an average of 0.5% in the second year and third quarter of the US presidency.
Sam Stovall, investment strategist at CFRA, said: “Historically, the second and third quarters of a U.S. presidential term have typically been the worst quarter for the S&P due to the uncertainty surrounding the midterm elections (November). U.S. stocks are likely to rally ahead of the earnings season and consolidate later in the third quarter.”
