Welcome to my latest video presentation. The article below is a condensed transcript. My video contains additional details and several charts.
U.S. stocks have rallied strongly off their June lows. Investor gloom is lifting and we’re seeing signs that the stock market has stabilized.
But make no mistake: If no new all-time high is set, we remain in a bear market. After two years of remarkable stock market gains, the year 2022 so far has been a rough one for investors. The S&P 500 turned in its worst half-year start since 1970.
We probably face further selloffs ahead, as stocks gyrate depending on Federal Reserve announcements, economic data, news of the war in Eastern Europe, and inflation readings. The coronavirus pandemic stubbornly flares up, just when we think it’s behind us, and supply chains, although improving, remain out of whack.
And yet, at the very least, it appears that the bear already has reached bottom and an appetite for risk-on assets is returning.
Stocks ended last week in positive territory, as investors put aside recession fears to focus on solid earnings results. Overseas stocks bounced back as well, despite increased monetary tightening by central bankers in Europe.
The current rally has occurred in tandem with a significant decline in longer-term interest rates, with the 10-year Treasury yield slipping from 3.5% to 2.75% (as of market close, Friday, July 22).
The U.S. Bureau of Economic Analysis releases its second-quarter gross domestic product (GDP) report on Thursday, July 28, amid growing expectations of a negative number. That would constitute the second quarter in a row of a contracting economy, the official definition of a recession.
If that happens and a recession is declared, expect the media (especially partisan outlets) to go berserk. How the stock market responds is hard to predict. Stocks might pop higher, because it would mean the Fed is more likely to get dovish. Sometimes on Wall Street, bad news is interpreted as good news.
The bond market seems to be anticipating a negative GDP number, which is why the 10-year note dipped below 3% last week.
For the S&P 500, there’s been price resistance at the 4,000 level. If the index breaches this threshold, recent bullishness could gain momentum.
There’s still enough fuel to propel stocks higher this year. Notably, the operating results of S&P 500 companies have been surprising on the upside.
For the second quarter of 2022, with 21% of S&P 500 companies reporting actual results, 68% have reported a positive earnings surprise and 65% have reported a positive revenue surprise.
For Q2 2022, the blended earnings growth rate for the S&P 500 is 4.8%. The blended revenue growth rate is 10.9%. The energy sector is reporting the highest year-over-year earnings growth of all 11 sectors, at a whopping 265.3%. (These figures are from research firm FactSet, as of market close, July 22.)
Due to the Russia-Ukraine war and other geopolitical tensions, you might assume that companies with greater international exposure would be getting hit the worst during Q2 earnings season, but that hasn’t been the case.
For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 1.2%. For companies that generate more than 50% of sales outside the U.S., the blended earnings growth rate is 10.2%.
Will the Fed pivot?
At the end of its July 26-27 meeting, the Fed is expected to hike rates by at least 75 basis points. However, the Fed may get more dovish after this hike, depending on inflation’s path.
Commodity prices have been falling across the board, suggesting that future inflation readings will be milder. Crude oil prices have tumbled 20% from their recent peak, and copper and lumber prices have declined 32% and 60%, respectively. Agricultural commodities have slumped as well.
A major driver of the decline in prices for raw materials has been expectations of slowing economic growth. But the jobs market remains a bright spot in the economy. The most recent report on initial jobless claims was generally positive, with only a slight uptick. Jobless claims still hover at historically low levels.
I’ve just described many challenges, but the next wave of technological innovation is poised to take off. You need to stay invested. When we’ve put inflation and the pandemic behind us, certain well-positioned companies will explode on the upside.
Our experts have come up with eight next wave predictions for the future. Some of their revelations may shock you. The time to increase your portfolio’s exposure to these trends is now, before the rest of the herd catches on. Click here for details.
John Persinos is the editorial director of Investing Daily.
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