Wall Street rebounds 0.3% as strategists diverge on next move

The S&P 500 clawed back a fraction of Friday's 200-point rout, but Wall Street's top strategists are split on whether the worst is over.

The S&P 500 rose 0.3% to 7,405.73 on Monday, recovering from its worst session since October as traders weighed competing views on inflation and Federal Reserve policy.

"Strong index performance has masked internal drama; dispersion of returns has jumped to post-Covid highs," said Savita Subramanian, head of U.S. equity strategy at Bank of America. "Red flags emerged over the past month, pointing to a soft patch ahead for the index and for tech."

The rebound was led by semiconductor stocks that had plunged Friday, with Micron Technology surging 9.9% and Marvell Technology climbing 9.6% in its first session after being added to the S&P 500. The PHLX Semiconductor Index rose 5.6%, recovering from a 10% slump on Friday that marked a technical correction for the market's most important sector. The Nasdaq Composite added 0.9% to 25,929.66, while the Dow Jones Industrial Average slipped 0.2% to 50,786.01.

The split among Wall Street strategists reflects an unusually wide range of outcomes. Subramanian's year-end target of 7,100 implies roughly 4% downside from current levels, while Morgan Stanley's Mike Wilson sees the S&P 500 reaching 8,000 by year-end — an 8% gain. The divergence comes as the market enters its most consequential week since the second quarter began, with new Fed Chairman Kevin Warsh set to hold his inaugural press conference alongside the May CPI release.

Friday's selloff, which erased 2.6% from the S&P 500, was triggered by solid labor market data that pushed Treasury yields higher, accelerating bets on a Fed rate hike and escalating tensions in the U.S. war with Iran. The yield on the 10-year Treasury edged up to 4.56% on Monday after jumping on Friday, while Brent crude held near $94 a barrel as the Strait of Hormuz remained effectively closed by a dual blockade.

"The correction was inevitable and ultimately healthy if this bull market is going to extend into year-end," said Wilson, Morgan Stanley's chief equity strategist. He said the improving macroeconomic backdrop could allow the broadening trade to resume once momentum-driven selling subsides.

Nancy Tengler, chief investment officer at Laffer Tengler Investments, said investors may be freeing up capital ahead of this week's $1.8 trillion SpaceX IPO by taking profits in stocks that have already outperformed. "There's still a tremendous amount of skepticism, which is a good thing for investors because markets tend to climb a wall of worry," she said.

CPI and the Fed Chair's Debut

The week's pivotal event arrives Wednesday, when the Bureau of Labor Statistics releases May inflation data just hours before Warsh holds his first press conference as Fed chairman. Futures markets are pricing the central bank's next move as a rate hike, though not before December. A hotter-than-expected CPI reading would "throw a bucket of cold water on momentum," said Jay Woods, chief market strategist at Freedom Capital Markets, pushing Treasury yields higher and pressuring high-valuation growth stocks and small-caps.

Despite the uncertainty, the S&P 500 remains up 8.2% for the year and 14% since the start of the second quarter, providing a cushion against further downside. The Russell 2000 index of smaller companies rose 0.8% to 2,855.42 on Monday, outperforming large caps for the session.

This article is for informational purposes only and does not constitute investment advice.