S&P 500 surges back towards 4500 level as analysts cite month-end buying

The S&P 500 surged towards a key area of resistance at the 4500 level on Monday, though was unable to surpass the big figure for now. Nonetheless, the indice's on-the-day gains currently stand at roughly 1.4%, taking the two-day run of gains to more than 3.5%. The tech-heavy Nasdaq 100 index is seeing even more impressive gains of over 2.5% on the session and is now up more than 5.0% in the last two sessions. The Dow is up 0.8% and probing its 200-day moving average at the 35K level, up about 2.5% in the last two sessions. The S&P 500 CBOE Volatility Index or VIX saw a sharp 2.5 point drop to around 25, taking it to now more than 13 points below last week’s highs near 39.

Some analysts put the strong gains, particularly in the hard-hit tech sector, down to month-end factors. “Today's and Friday's bounce is just some of the institutional guys saying Nasdaq was due for end of the month rebalancing… It is simply a little bit of a relief rally after such a sharp sell-off," said an analyst at Ally Invest. But the Nasdaq 100 index was also helped by a more than 9.0% jump in Tesla’s share price after being upgraded to “outperform” at Credit Suisse, and amid a nearly 10.0% jump in Netflix after shares were labeled as “buy” at Citigroup.

Nonetheless, the Nasdaq 100 looks set to close out the month 9.1% lower, the S&P 500 5.6% lower and the Dow 3.7% lower. Fed tightening fears have been the major driver of the downside, with markets now expecting five 25bps rate hikes in 2022 and with Fed speakers so far this weak doing nothing to dampen this speculation. Fed speakers have also done nothing to dampen speculation that the first move, expected in March, could be a 50bps rate hike. Fed’s Raphael Bostic, speaking over the weekend and again on Monday, explicitly outlined a 50bps as a possibility (though not his base case assumption).

Looking ahead this week, the Fed tightening story will receive further inputs in the form of plenty more Fed speak, as well as key US data releases, most important of which is Friday’s January labour market report. The report will be closely scrutinised for signs of wage inflation and a further tightening of the labour market, given that this is what the Fed is mostly focused on right now. The headline NFP number won’t be as important, with economists and the Fed expecting a weaker number compared to recent months given the impact of Omicron.

Another important equity market theme this week is the ongoing Q4 earnings season. Following last week’s decent results from Apple and Microsoft last week, Alphabet (Google), Amazon and Meta Platforms (Facebook) will be reporting. According to Refinitiv data cited by Reuters, 77.4% of S&P 500 companies who have reported earnings thus far (about one-third of the index) have beaten analyst expectations. To shield equity markets from further Fed tightening fears induced downside, this strong run of earnings will need to continue.