We have been here before, more than once and not long ago. The S & P 500 closed the week at about 3,900. The index first hit this level 17 months ago on the upside and again in May on the descent, finishing at 3,900.86 on June 10. This time, the index gets to the level riding a 7% rebound rally. It’s one of a half-dozen 5% or better bounces this year, an average of roughly one a month, that interrupted but haven’t halted the slide that began Jan. 3. The question shadowing Wall Street is also now a familiar one: Is there anything different about the current rebound attempt that makes it appear more likely to travel further in time and distance than those that flared up and fizzled before? The answer, of course, is yet to be determined. The magnitude and force of the rally since mid-June has not yet graduated beyond “oversold bear-market rally” status. Each of the brief S & P 500 rebounds this year has touched or briefly exceeded its 20-day average, a short-term trend indicator that frequently contains rallies in declining markets. A notable test for the S & P 500 With another 2% to 3% gain, the index will have a more notable test: its 50-day average and the 4,000 level from which it broke down badly in June. This means the burden of proof still sits squarely on the optimists who say this is the real turn higher, from a purely technical perspective. Still, a few things arguably distinguish the current upside effort from the failed forays of the past six months. For one thing, this recovery phase started from the lowest valuation, the deepest oversold conditions and the most depressed investor sentiment backdrop of any of the fleeting rallies before it. The S & P 500 got below 16-times next-12-month forecast earnings. It’s not anything like a generational bargain, but down about as much from the valuation peak as retrenching markets have tended to get – with a few unpleasant glaring exceptions. This chart from Truist showing the degree of valuation adjustment is a picture of froth blowing away and optimism escaping equities. As with so many historical patterns that now compare closely to the present set-up, the probabilities begin to favor good returns looking out months or years from here – unless we’re in for something like the multi-year recession-shrouded corporate-distress bear runs as in the early 2000s or in the Great Financial Crisis. Estimates are coming down Talk of the helpful valuation compression already in the books is quickly shouted down by those countering that consensus earnings forecasts simply must come down and that this will come as a shock to the market even though most everyone has been talking about it and stocks just had their worst half-year in a generation. True, headline consensus forecasts for the S & P 500 collectively have held up and even for the second quarter are seen growing by 4% or so. Yet outside of energy and materials, analysts have been steadily cutting estimates – with a net 25% to 40% of companies in industrials, technology, communication services and consumer discretionary sectors seeing projected profits fall, according to Bespoke Investment Group. The Leuthold Group looked at the S & P 500’s performance leading up to and following the profit peak in the only four periods since 1995 when 12-month-forward earnings fell appreciably. The analysis was intended to show how stocks do poorly once estimates start sliding. Yet in every prior case, the index was up over the six months before the estimate peak. Over the past six months, the S & P is off close to 20%, so perhaps the market now isn’t oblivious to potential earnings risk? Sentiment indicators have not been particularly helpful this year, given the relentless downside momentum and ever-tightening financial conditions. Still, at further extreme extremes, the forces of mean-reversion and contrarian logic should become tailwinds. The 52-week average of bullish respondents to the weekly American Association of Individual Investors’ retail-investor survey is now below 30%, a pretty rare degree of slow-motion surrender seen only a few times over 35 years, last in 2016. Large speculator accounts are now as severely net short S & P 500 index futures as they’ve been since 2020. Not an instant wrong-way signal at all, but it shows defensive positioning and potential for buying scrambles into sharp rallies. Has the inflation fever broken? On the macro front, the current lift in stocks has come with market-implied future inflation expectations just about at their lows for the year, a sign that the fever over supposedly untamable inflation has broken. This has coincided with Treasury yields sitting below where they were at the stock-market lows in June. For now, bonds are doing a better job holding their value rather than exacerbating a bad year in equities. This is all quite tentative and contingent on the latest data release, but for the moment it eases some of the pressure on stocks. On a more impressionistic level, each of the last five trading days has seen the market weakening overnight or into the morning, followed by a bid that led the index well higher by the close. Not an all-clear by any means but at least suggestive of professional investors being under-exposed to stocks entering the second half after a rare two straight down-10% quarters. The nasty and deep correction in crude oil, other commodities and energy stocks haven’t undone longer-term uptrends but certainly flushed out the one remaining pocket of momentum and overconfidence across markets, a healthy occurrence all else being equal. Growth stocks have been outperforming for weeks and the Russell 1000 Growth relative to value is bumping up against its multi-month downtrend. When big growth names perform well, it tends to be more supportive of the S & P 500 – though it’s far too early to declare a tidal shift in their direction. A major challenge remains None of this removes the over-arching challenge investors have faced all year: A slowing economy and mature profit cycle coinciding with an aggressive Federal Reserve intent on chasing down inflation and uninterested in looking for chances to ease back. Friday’s healthy jobs report eased immediate worry over recession, but it will merely keep the Fed focused solely on inflation. Credit markets firmed up a lot the past two days, but they had been flashing concern over a weaker economy for weeks beforehand. Right or wrong, we’re in a moment where the market seems to think it’s now more in tune with the likely policy path, easily absorbing hawkish Fed-official speeches last week as the bond market sees short-term rates peaking in several months. Yet Wall Street has believed this at other times this year and learned a tough lesson. So, sure, some things are different surrounding the latest little rally. Whether different enough in the right ways to make give this bounce escape velocity is still to be proven.