SPY SPDR S&P 500

The S&ampP 500 index fell close to 10% between August and October 2023 due to geopolitical tensions, elevated inflation, and rising interest rates, resulting in a sluggish macro economy. 

However, as economic activity remains tepid globally, experts believe it will allow countries to rein in inflation in the next 12 months. This, combined with the possibility of normalizing interest rates, has driven the S&ampP 500 index higher by 8% this month.

Let’s see what should drive the equity markets in the next week.

Moody’s cuts U.S. outlook to negative

MoodyU+02019s Investors Service downgraded its outlook on the U.S. governmentU+02019s credit rating to negative from stable on Friday, signaling escalating concerns over the nationU+02019s fiscal strength. While maintaining the U.S.U+02019s Aaa long-term issuer and senior unsecured ratings, MoodyU+02019s warned that the U.S. is expected to sustain substantial fiscal deficits without effective fiscal measures to curb spending or enhance revenue. According to MoodyU+02019s, this is set to markedly diminish debt affordability, especially in the current climate of rising interest rates.

The rating agency also cited the political leadership in Washington as a detrimental influence, suggesting that ongoing division within Congress heightens the risk of an inability to agree on fiscal strategies to mitigate the downward trajectory of debt affordability.

Despite these concerns, MoodyU+02019s affirmed the top-tier Aaa rating, anticipating the U.S. will maintain its exceptional economic vigor and suggesting that any further positive economic developments could decelerate the worsening of debt affordability.

Is another government shutdown on the cards?

Responding to MoodyU+02019s outlook shift, Deputy Secretary of the Treasury Wally Adeyemo expressed disagreement, emphasizing the strength of the U.S. economy and the global trust in Treasury securities.

The downgrade in outlook coincides with Congress facing another potential government shutdown. Currently funded until November 17, disagreements persist in Congress regarding a long-term funding solution.

House Speaker Mike Johnson has announced intentions to reveal a Republican funding strategy on Saturday, setting up a potential vote for Tuesday. However, through December 7 for some government areas and through January 19 for others, his approach of staggered funding has been deemed nonviable by the White House and the Democrat-majority Senate.

The White House has attributed MoodyU+02019s decision to alter the U.S. outlook to the extreme and dysfunctional behaviors of Congressional Republicans.

This change by MoodyU+02019s follows a similar move by Fitch in August, which lowered the U.S.U+02019s long-term foreign currency issuer default rating, citing projected fiscal decline over the next few years, weakening governance, and an increasing debt burden. Fitch also noted that the recurrent confrontations and last-minute resolutions regarding the debt ceiling have undermined confidence in the U.S.U+02019s fiscal stewardship.

Analysts expect the S&ampP 500 earnings to surge 11% in 2024

According to Nicholas Colas from DataTrek Research, while there is a chance for the U.S. economy to enter a recession in 2024, these concerns are not reflected in consensus estimates. According to average analyst estimates, the S&ampP 500 is forecast to increase adjusted earnings by 11% year over year to $246 per share in 2024, up from $221 per share in 2023.

Colas explains, “The S&ampP trades for 18x analysts’ 2024 estimates, but 28x a 30 percent decline from this year’s earnings. The latter number seems unrealistically high if the US really is heading into a recession next year.”

Grafico Azioni SPDR S&P 500 (AMEX:SPY)
Storico
Da Ott 2024 a Nov 2024

Grafico Azioni SPDR S&P 500 (AMEX:SPY)
Storico
Da Nov 2023 a Nov 2024