Market Dip Today, Rally Tomorrow: The Positive Side of PCE Data

Early Friday, stock index futures indicate the S&P 500 may face another decline. Over the past two days, the Wall Street barometer has fallen 1.33% due to disappointing technology sector earnings, which have dampened optimism about AI-related companies.

Rising borrowing costs have also hurt sentiment. Midweek, the 2-year Treasury yield rose above 5% again as Federal Reserve officials emphasized that inflation remains too high to consider cutting interest rates soon.

Inflation concerns will be the focus on Friday, the last session of May, with the release of the April personal consumption expenditure (PCE) price index at 8:30 a.m. Eastern.

Tom Lee, head of research at Fundstrat, believes the recent market dip increases the likelihood that the PCE report will trigger a stock rally. Historically, the S&P 500 has risen by a median of 0.3% over one day and 0.8% over five days following the 16 most recent PCE releases, with win ratios of 83% and 75%, respectively.

Lee notes that when the market dips ahead of the PCE report, the returns are even better. Since the end of 2022, the S&P 500 has declined before the inflation data four times and subsequently gained each time, with increases of 0.8% in February 2023, 3% in May 2023, 0.2% in September 2023, and 5.3% in October 2023.

Interestingly, these gains were not necessarily due to cooler-than-expected PCE prints; in three out of the four instances, the core PCE was hotter than forecasted. This suggests that even slightly higher-than-expected PCE data on Friday could lead to a stock rally.

Lee believes the recent consolidation in stocks is ending, with June looking positive for five reasons:

1. The historic median gain for the S&P 500 in June, when April is negative but May is positive, is 3.9%.
2. Favorable data points are expected, including today’s PCE, the New York Fed’s inflation expectations survey on June 10, and the U.S. consumer price index for May on June 12.
3. Investors are using low leverage, according to New York Stock Exchange Margin Debt data.
4. There is still $6 trillion in cash on the sidelines.
5. Earnings season shows strong AI spending and transformation.

“If the seasonal median gain of 3.9% holds, the S&P 500 could potentially reach 5,500 in June,” Lee concludes.