It's been a quiet week so far...

Friday’s Core PCE Price Index could be particularly interesting as markets are closed for Good Friday. “This is a week to stand still while we wait for the latest US inflation data,” said Alexandre Hezez, chief investment officer at Group Richelieu, a Paris-based asset manager.

Treasuries steadied after rebounding from session lows on Tuesday following a $67 billion sale of five year-notes. The dollar was flat against its Group-of-10 peers, while the offshore yuan weakened.

US equities finished lower for a third straight day on Tuesday. The Dow slipped nearly 0.1%, while the Nasdaq fell 0.4% as technology stocks struggled. With a slide of 0.3%, the S&P 500 saw its third down trading day in a row.

“Valuations could take us back to, sort of, reality,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management. But, “long term, this rally has legs and there’s a lot of momentum because of liquidity.”

As of Tuesday’s close, the S&P 500 has added 2.1% in the month and 9.1% in the quarter. The Nasdaq has climbed 1.4% in March and 8.7% over the three-month period, while the Dow has added 0.7% and 4.2% in the respective periods.

Traders will monitor commentary from Federal Reserve Governor Christopher Waller on Wednesday evening. There’s no closely followed economic data expected on Wednesday.

With the equity outperformance, pensions would need to sell roughly $22 billion in global stocks and buy $17 billion of fixed income in order to return to prior asset allocation levels, according to a recent estimate from Morgan Stanley.

This number is said to be even higher at Goldman Sachs who believe pension funds are likely to sell closer to an estimated $32 billion inequities to rebalance their positions.

That would be the biggest adjustment since June 2023 and rank in the 89th percentile among estimates over the past three years.

While projections on pension flows vary widely on Wall Street, it could heap extra pressure on markets when trading volumes are thin around Easter. After the S&P 500 soared about 26% since late October, traders have flagged concern that positioning is stretched and stocks are more vulnerable to short-term profit-taking.

The US equity benchmark is on track to notch five straight months of gains from November through March, a feat only accomplished one other time this century in 2013.

Now, traders are debating whether the road gets rougher for the rally to keep chugging along as stock valuations remain elevated relative to history.

The S&P 500 approached 5,200, with Nvidia halting a six-day rally. United Parcel Service Inc. slumped over 8% as investors saw its long-term sales target as hard to meet. Former president Donald Trump’s startup Trump Media & Technology Group climbed in its first session as a publicly traded company.

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“As momentum slows and breadth diverges, we believe the S&P 500 could benefit from a healthy pullback of at least 5% toward its 50-day moving average — a level last tested in early November,” said Craig Johnson at Piper Sandler.

As the big debate unfolds on how concentrated or broad this year’s S&P 500 rally has been, looking at the contribution to total returns, 60% of gains in the gauge have been driven by just six stocks: Nvidia, Microsoft, Meta, Amazon, EliLilly and Broadcom.

The artificial intelligence furore gripping the stock market has made chipmakers like Nvidia increasingly crucial to the broader S&P 500 rally. The stocks are no longer cheap, adding a new level of risk to further gains in the equity benchmark.

The Philadelphia Stock Exchange Semiconductor Index is priced around eight times sales, the highest in at least two decades, according to data compiled by Bloomberg. The S&P 500, by contrast, is priced around 3 times sales. Relative to the broader benchmark, the chip index is higher than it was during the dot-com peak in 2000.

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“Expect some churning in the market over the coming quarters with mixed data and a question on how long the Fed intends to pause,” said Victoria Fernandez at Crossmark Global Investments. “We would not be surprised to see another rate cut priced out of the market pushing yields slightly higher from current levels as economic data continues to show strength and current levels don’t appear to be very restrictive.”

For stocks to warrant their multiple expansion in recent months, global central banks must ease monetary policy this year and companies have to deliver healthy earnings growth, according to JPMorgan Chase & Co.’s Marko Kolanovic.

If earnings disappoint and central banks are more restrictive, equity multiples would need to fall, he added.

Bank of AmericaCorp.’s institutional, retail, and hedge fund clients were all net sellers of US equities in the week ended March 22, while corporations purchasing their own shares were the sole net buyers.

With a quiet remainder of the week to come before the big one being released on Friday – US Core PCE Price Index. With the market closed, there will be no orders or pricing in the market and this is likely to cause a big move one way or the other come the opening bell next week.

Core PCE prices in the US, which exclude food and energy, increased by 0.4% from the previous month in January 2024, the most since February 2023 but in line with market expectations. It follows a downwardly revised 0.1 per cent increase in December. Core PCE prices rose by 2.8% from the previous year, the least since March 2021 and slowing from 2.9% in December.

The Consensus for February being released on Friday is 0.3%. While this still indicates some small decline from the increases this time last year, there isn’t much room for error here. Some data points have driven the year-over-year figure down, but these numbers are still too high when the Fed is looking for a monthly average of 0.16%.

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We’ll update you on the release in our weekend review. A number higher than 0.3% and stocks could be in for a gap open down next week.

0.3% is priced in, but how could this possibly be good news?

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