Markets next week may keep thinking about what could go right

Published Fri, May 19 20234:40 PM EDTUpdated Fri, May 19 20235:04 PM EDT

It may be a grudging rally. One strategist said investor sentiment may just grind higher. It may prove sharp, yet brief and unsustainable. But a rally by any other name is still a rally. At least that's the thinking of a small but growing chorus of voices on Wall Street who outline the case for further stock market gains after both the S & P 500 and Nasdaq Composite touched nine-month highs this past week. Of course, that's all predicated on an eventual resolution to the debt ceiling negotiations between President Joe Biden's White House and House Speaker Kevin McCarthy 's (R-Calif.) GOP House caucus, and the United States not defaulting on its debts for the first time in history. "The bulls are back in the driver's seat on the heels of investor optimism over a likely debt ceiling resolution and a near-term exodus from the Fed's hawkish interest rate policy," said Greg Bassuk, chief executive at AXS Investments. "Investors are looking to build upon the positive momentum." The idea is that if markets can put the debt talks, the regional bank crisis and the hawkish Federal Reserve in the rear view mirror and get on with anticipating continued strength in consumer spending and the jobs market, investors will have greater certainty about the second half of the year and push prices higher. "While Fed policy and interest rate hikes have been the investor narrative since last year, there's heightened consensus that we're nearing the end of the rate hike cycle," Bassuk said, and sentiment is improving as a result of "being situated at the tail end of the Fed's hawkish policy." The end of the Federal Reserve's interest rate hikes to fight inflation would herald a better stock market than interest rate cuts, which are a reaction to a contracting economy, a recent Credit Suisse report noted. It's not until November that a majority (74%) of those on Wall Street foresee the central bank cutting the fed funds rate, according to the CME FedWatch Tool . By December, the odds increase to 92%. Fueling the past week's 3% advance in the Nasdaq Composite and 1.6% rise in the S & P 500 back to levels last seen in August was stock investors "discounting a very sharp recovery in economic activity. A recovery that would be inconsistent with rate expectations," wrote Andrew Garthwaite, Credit Suisse global equity strategist, on Friday from London. A simpler explanation may be that traders had recently grown so pessimistic in the wake of the Silicon Valley and First Republic failures, that now they've had to cover their bets against the market, and that investors have a "fear of missing out," said Jeff Kilburg, CEO of boutique investment adviser KKM Financial in Chicago. "Here we are potentially looking to put more people in a position of pain as we test a breakout to the upside," Kilburg said. "So short term, you know, I have optimism on the market, but I also have optimism that we're going to find a way to move forward, the U.S. government's never truly going to walk away" from its financial obligations. Kilburg also takes heart in the CBOE Volatility Index . The VIX was trading around 16-17 late this week, signaling no great fear among professional traders. "What that means to me as an options trader is that no one is overly concerned, by any means, that the U.S. government is going to actually default," he said. That sentiment largely persisted even as talks took a pause on Friday . Meanwhile, he said, first-quarter earnings were better than feared. Walmart and other retailers this week highlighted consumers are spending less freely, but they're still spending , and that drives two thirds of the economy. "I'm not saying it's sustainable for the market to go up to 4,450 in the S & P 500 and stay there, but it does seem like we're going to break out of this range, and the path of [least] resistance is actually to the upside," Kilburg said. .VIX 1M mountain CBOE VIX index over past month. "Fundamentals mean diddly-squat in a speculative bubble," said Bank of America investment strategist Michael Hartnett in a note on Friday that used the phrase "melt-up" in connection with the latest move upward and the bull market in everything artificial intelligence-related. Hartnett noted that "one definition of a 'bubble' is when an asset price ignores a rise in the cost of capital." According to the latest BofA fund manager survey, the "pain trade" that would inflict the greatest damage on the most investors would carry the S & P 500 to 4,400 (from a little less than 4,200 late Friday), and the 10-year Treasury yield to 4.00% (from 3.70%). For the past two months, stocks have traded as though the collapse of Silicon Valley Bancorp was more like the failure of Long-Term Capital Management in 1998 — setting off a big bull run — than the demise of Bear Stearns in 2008, which preceded the Global Financial Crisis, Hartnett wrote. Even Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote late this week that he has to entertain what could go right in markets, despite the fact his own view is fundamentally bearish. "With inflation surpassing wage growth, consumers have been saving less, drawing down savings, or borrowing to meet living expenses," Haefele said. "Yet credit card delinquencies remain low, real incomes are rising as inflation falls, and consumer confidence is improving. If the U.S. consumer can successfully 'bridge the gap' until real wage growth becomes positive, economic growth may prove more robust than we expect, and markets may continue to move higher." If that "upside scenario" happens, UBS sees global stocks moving 13% higher by the end of December, and the S & P 500 surging another 6% — to north of 4,400. Week ahead calendar Monday 8:30 a.m.: Fed's Bullard speaks on U.S. economy and monetary policy 11:05 a.m.: Fed's Bostic and Barkin discuss technology-enabled disruption Earnings : Nordstrom Tuesday 8 a.m.: Building permits (April) 9:00 a.m.: Dallas Fed's Logan gives welcoming remarks at a conference on technology-enabled disruption 9:45 a.m.: PMI Composite (May) 10 a.m.: New home sales (April) Earnings : Lowe's, AutoZone, Intuit, Agilent Technologies, VF Corp., BJ's Wholesale, Dick's Sporting Goods, Williams-Sonoma, Toll Brothers, Palo Alto Networks Wednesday 2 p.m.: FOMC minutes Earnings : Raymond James Financial, Analog Devices, Nvidia, Kohl's, EnerSys Thursday 8:30 a.m.: GDP (Q1) 8:30 a.m.: Initial jobless claims (week ended May 20) 10 a.m.: Pending home sales (April) Earnings : Dollar Tree, Best Buy, Ralph Lauren, Autodesk, Ulta Beauty, Costco, Deckers, Gap — CNBC's Alexander Harring, Fred Imbert and Michael Bloom contributed to this report.