Week of Sep 15 2024

Beyond the immediate focus on the Fed, market participants are closely watching a series of "liquidity drain" events, including September options expiration, corporate tax payments, and buyback blackouts. These events, coupled with seasonal patterns, could exacerbate market movements in the coming weeks. Additionally, the potential unwinding of corporate FX deposits in Europe and Asia poses a risk to U.S. Dollar strength, with implications for emerging market currencies and global capital flows.

Amidst this monetary policy uncertainty, corporate earnings continue to show resilience. The LSEG S&P 500 Earnings Scorecard reveals a forward 12-month earnings estimate of $259.80 per share, supporting a relatively high P/E ratio of 21.5x. This valuation, while elevated compared to historical averages, suggests investors are pricing in continued growth despite some moderation in earnings expectations for upcoming quarters. The technology, financials, and consumer discretionary sectors are expected to be the primary drivers of earnings growth, offsetting weakness in energy and real estate.

The left tail risks center on the possibility of a harder-than-expected economic landing, particularly if labor market deterioration accelerates beyond current projections. This scenario could force the Fed into an even more aggressive easing cycle, potentially leading to a significant repricing of risk assets. Conversely, right tail risks include an unexpected resurgence in inflation or a stronger-than-anticipated economic rebound, which could catch the market off-guard and lead to a sharp reversal in current dovish expectations.

From a technical perspective, traders are monitoring the S&P 500 range between 5300 and 5550, based on significant put spread activity. The U.S. Dollar's performance against major currencies, especially the Japanese Yen and Euro, is another key focus, with potential for further weakness if aggressive Fed easing materializes. In the rates market, the steepening of the yield curve and the behavior of the 2-year and 10-year Treasury yields are being watched as indicators of market expectations for Fed policy and economic growth.