The Dow Jones traded in a 250-point narrow range, while the S&P 500 and the Nasdaq put an end to their best winning run in years. The Nasdaq’s 13-day winning streak, the longest since 1992, came to an end at the start of the week amidst rising uncertainties over the ceasefire extension with Iran and a possible peace deal.
However, the indices have had a very strong month of April so far. The Dow Jones is up 7% so far this month, while the S&P 500 and Nasdaq have risen 8.9% and 13% so far this month respectively.
Analysts have cited a weak foundation to this recovery, stating that investors do not appear very convinced in this rally considering the near-term uncertainties that lie ahead. Here are five factors that determine the same:
Weak Market Breadth
When the S&P 500 first hit record highs last week, only half of its constituents were trading above its 50-Day Moving Average.
That figure is well below the record highs seen in January this year or during the recovery from US President Donald Trump’s tariff tantrums last year.
Fear of Weak Guidance
Even if Wall Street companies report strong results this time around, the focus will be higher on the guidance they give for the road ahead.
Investors will be even more focused on guidance than normal and, “if there’s a crack in the story,” there’s a major risk to the market, said Walter Todd, chief investment officer at Greenwood Capital Associates.
More analysts have already begun cutting profit estimates compared to raising them and the proportion of companies raising their earnings and sales outlook has been declining simultaneously, as per 22V Research.
Poor Participation
The recovery that has taken place on Wall Street this month has happened on sub-par volumes.
According to Bloomberg data, trading volumes on the S&P 500 in April is 11% below its six-month average. In comparison, during the sell-off in March, the volumes were 9.6% higher than the six-month average.
JC O’Hara of Roth Capital Partners said that this shows investors had more conviction in the declines than they do in the recovery.
Subdued Sentiments
A measure of investor sentiment run by Barclays Plc declined even as the S&P 500 hit a record high.
The bank said that there have only been five previous instances in the last 20 years when this indicator has slipped during a sharp recovery
Barclays attributed this recovery to speculators exiting bets on equities losses and institutional investors who were underweight and were pulled from the sidelines.
The Road Ahead
According to Bloomberg data, the average S&P 500 target for the year-end is at 7,400, around 5% higher from current levels.
Citigroup on Monday, reiterated its target of 7,700 for the index but also acknowledged several “unforeseen headwinds” for the market, including the potential for AI disruption and the duration of the war.
“Near-term caution is warranted given the market’s narrow breadth, light volume and unresolved risks stemming from the conflict in Iran,” said Anthony Saglimbene, chief market strategist at Ameriprise.
(With Inputs From Agencies)
