LIVE MARKETS-US stock rally beginning to lose steam?

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US STOCK RALLY BEGINNING TO LOSE STEAM?

TS Lombard's senior macro strategist Daniel von Ahlen is making the case that there is not much upside left in the recent rally in U.S. stocks, which saw the S&P 500 .SPX post a 30% gain since post-Liberation Day lows.

In a research note, von Ahlen writes that technical support is waning at a time when U.S. macro momentum is fading. Even though sentiment and positioning are not at panic levels from a contrarian perspective, he says "market breadth has weakened in recent weeks."

For instance, he cites the investing behavior of CTAs or commodity trading advisors. He says CTAs appear to be currently highly exposed to stocks given that equities have been the "key durable cross-asset trend" in recent months. But he notes that the boost to equity prices from CTA buying seems to have been exhausted: TS Lombard indicators suggest that CTA exposure is sitting at the 95th percentile.

"Further declines in risk sentiment or a continuation of the hard data slump in the U.S. could invite selling by the trend-following community and amplify a potential pullback in equities."

On the earnings per share front, von Ahlen acknowledges that the strong improvements in EPS revision ratios have provided fundamental support for the equity rally of late. But that ratio is now at a cyclical high, he says. This suggests that the equity market is looking at "peak revisions momentum" soon against the backdrop of a lackluster U.S. macro picture.

The Q2 earnings season, meanwhile, has seen 81% of the S&P 500 members beating earnings estimates, he says, with about 90% having reported, but notes that under the hood, margin pressures are already evident in many sectors.

"Even if strong earnings revision momentum still provides cover for U.S. equities, stretched valuations and already chunky forward earnings expectations will likely constrain any further meaningful upside this year," von Ahlen points out.

(Gertrude Chavez-Dreyfuss)

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