The S&P 500’s bounce is set to face its first hurdle to prove it’s more than a snapback

This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. Investors have moved on from the “too hot” porridge of runaway inflation worries and are now sampling the “too cold” bowl of rising slowdown/recession concerns. For now, the markets are navigating the shift reasonably well, even as fewer observers expect a “just right” outcome. Further deceleration in manufacturing and service PMIs join flagging housing activity, a rollover in commodity prices and slipping durable-goods demand to swing the focus toward economic slippage. This has quickly prompted the market to reduce its implied expectations for how far the Federal Reserve can and will go in jacking up rates. For the moment, stocks are OK with this, with less-cyclical large-cap growth and defensive groups pushing higher to take the S & P 500 toward the week’s high near 3,800. That’s a first hurdle toward this week’s bounce proving that it’s more than just a reflex snapback. The Treasury market is reacting dramatically, surrendering all the upside in yields following the hot consumer price index report less than two weeks ago and the Fed’s 75 basis point bump last week. Two-year yield cracking under 3%, nearly a half-percent beneath the recent peak, removing the equivalent of two 25 basis point hikes from the Fed tightening outlook over the next two years. Market now sees short rates peaking late this year with cuts possible in 2023. This compressed, spring-loaded economic cycle continues to hustle along, with expectations whipsawed in a jarring way. The whole soft versus hard landing debate is like the plane that keeps tilting steeply in each direction on the descent. The macro call is tough as ever and the stakes are high, though an equity investor might at least derive some measure of comfort from the fact that expectations have been reset to a dim level and valuations are undergoing a decent reckoning. Investor surveys continue to show rampant unease, which is better than the reverse, though it’s a bad timing tool in a market downtrend. The equity exposure of the NAAIM money manager cohort has rolled back over toward a record low. Pros are very defensive. Retail investors are scared, but arguably they have not responded dramatically by liquidating much of their equity bets. Of course, the market itself has given stock allocations a severe haircut, so portfolios might not seem out of balance. Individual investors seem frozen, not complacent. Unclear if the distinction matters for those seeking a clear sign that the herd has fled the pasture. Earnings estimates might well have a good deal of downside, but this might not be fresh news to the market. Valuations falling imply less confidence in estimates. Ex-energy, S & P earnings-growth projections are indeed falling, off 3-5 percentage points since January for quarters two through four of this year. Any high inflation means decent nominal GDP, which is in part captured by companies in sales and profits, so a stalling real economy isn’t a one-for-one match for a stagnant corporate bottom line. Credit spreads are registering the macro worry as well. Part of the Fed’s intended tightening of financial conditions. Still not nearly as wide/stressed as in early 2016. There is also not a major glut of maturities in the next year or so, meaning this is mostly a price phenomenon and not about companies unable to roll over debt. But equity markets won’t return to an embrace of risk or higher valuations if the line keeps rising. Market breadth is respectable: more NYSE and Nasdaq stocks up than down but not a clincher for the bulls or bears. VIX hovering in the high 20s, staying in the “on alert but not panicking” zone. It should get heavy if the S & P stays with mild intraday moves and the mega-caps keep supporting the indexes.