Piper Sandler says S&P 500, Magnificent 7 'need a break'

U.S. stocks continued on their upward trajectory in March, with the S&P 500 reaching a new record closing high last Tuesday. However, recent mixed signals from the U.S. economy and technical analysis suggest that the benchmark index may be poised for a correction. 

Monster S&P 500 rally in 2024

Like in 2023, the overall robust performance of the stock market has been mainly driven by the Magnificent 7 group of stocks, most notably Nvidia (NASDAQ:NVDA), which continues to thrive on the ongoing expansion in the AI space. 

The chipmaker’s shares are already up 79% this year, compared to an 8% gain in the S&P 500 during this period. Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) also witnessed a solid performance, rising roughly 40%, 15%, and 11% year-to-date, respectively. 

The rally has been further fueled by largely positive economic data, with inflation rates easing and expectations of rate cuts later in the year. However, the U.S. economy has been sending mixed signals more recently. 

Data such as payroll numbers, GDP growth, and core personal consumption expenditures price index suggest an economy that is both resilient and experiencing a cooling in inflation. However, other indicators like jobs reports and wholesale inflation highlight more concerning trends.

S&P 500, Magnificent 7 to correct from here - Piper Sandler

The S&P 500 remains close to its all-time highs but strategists at Piper Sandler believe that market bulls may “need a rest.” This is because more recently, major stock indices have been showing signs of weakening momentum and are testing the higher ends of their price channels.

Despite hitting a record closing high, the S&P 500, alongside other major indices, ended last week on a lower note. This downward movement was mainly influenced by sticky inflation rates, disappointing retail sales, and job figures that suggested the economy remains strong. 

The Fed Futures indicate that the likelihood of the Federal Reserve's first interest rate cut is now more likely to happen during the September FOMC meeting, instead of June. 

Out of eleven sectors, seven ended the week in the red. Real Estate, Consumer Cyclicals, and Technology sectors were among those that saw the most significant drops. Conversely, the Energy sector, as indicated by the Energy Select Sector SPDR Fund (XLE (NYSE:XLE)), demonstrated resilience with a 3.8% increase, standing out as the week's top performer.

“Based on the weight of the technical evidence, we believe this bull market needs a break,” Piper Sandler strategists said in a Monday note. 

“While some trimming of gains in extended leadership is likely over the near term, we view modest pullbacks and consolidations as healthy as the intermediate-term uptrend/price channel remains intact. We reiterate our 2024 SPX year-end price target of 5,050.”

When it comes to Magnificent 7, all seven stocks continue to show long-term upward trends, however, it's possible that some may experience significant corrections if they test their long-term uptrend support lines again, strategists added.