Wall Street is embracing for bad news

Wall Street is bracing for bad news.

North American stock markets lost momentum in May as the US debt ceiling discussion, sticky inflation, and gloomy corporate earnings weight on the prospect of equity markets. S&P 500 lost 1.43% while Nasdaq gained 0.95% month to date. Canada’s S&P/TSX composite declined 1.91%.

The US government is in talks with Congress to increase the US debt ceiling to over the current 31.4 trillion dollars limit. The two parties are unlikely no to reach a deal soon but markets are not thrilled about the continued increasing debt levels of the biggest economy in the world, especially at these high-interest rates.

The other news was the US retail sales which rebounded in April, showing consumer spending is strong despite elevated inflation levels and the danger of potential recession. Meanwhile, the gloomy earnings report coming from companies like Home Depot and slow economic data from China dampened the mood of the markets.

The futures contracts on the S&P show that investors are taking extremely bullish positions. The futures position is near record levels worst than the COVID era and close to the 2008 financial crisis, showing a lot of investors are taking bearish positions.

Meanwhile, the central bank’s officials do not believe any cuts in interest rates will be coming soon but Fed futures contracts are pricing at lower rates as the markets are expecting something to break soon and the central bank has to lower the rates in 2023.

65% of the economists surveyed expect the US economy to weaken this year. All these signs halted the stock market rally in May as Wall Street embracing for something bad to happen but what would be a catalyst is still the big question mark.