Inflation
Stocks have been weak this year due to inflation at 40-year highs. There are signs that inflation is subsiding. As China begins to reopen supply bottlenecks should alleviate creating more supply and driving prices lower. New home sales were down 17% in the latest report. This coupled with interest rates rising is likely to cause house prices to recede. New car sales were down 11% in April. Used car prices have dropped for the past 3 months indicating a reversal from record prices in December 2021. Additionally, oil prices are down almost 15% over the past month. Lastly, the 5 year forward inflation rate, which the Federal Reserve uses as a measure of inflation peaked in April 2022 and has been falling since.
Valuation
One argument being made about why stocks were not attractive this year is that they were expensive. The NASDAQ 100 at one point this year was down over 30%. The S&P was down over 20%. The drop in stocks has brought valuations closer to historical norms. Additionally, earnings growth for the S&P 500 is projected to increase 9% this year which is solid growth given the supply chain disruptions and record high inflation the economy has faced.
Institutional Rebalancing
JP Morgan estimates $250 billion will flow into stocks this summer as institutional investors rebalance portfolios to bring them in line with allocations. There are a number of models that run off 60% stocks/40% bonds. With stocks down 19% this year those allocations are off with stocks being under proposed allocations so they will need to be rebalanced in June and more stocks will need to be bought to bring them in line.