Weekly Update (07-17 – 07-24): Entering Earnings Season

Hi all –

I hope your week is going well, and hope you are staying cool in the summer heat! I wanted to provide a high-level market update for the week as we enter earnings season.

As we had been expecting in our most recent weekly update, inflation came in very cool, dropping 1 percentage point month-over-month. We are now within spitting distance of the Fed’s 2% gauge, while more work remains to be done to tamp down core inflation.

In Nobel Laureate Economist Paul Krugman’s recent op-ed entitled: Everything’s Coming Up Soft Landing, he discusses why a soft landing for the economy now looks more likely than not: Opinion | Everything’s Coming Up Soft Landing - The New York Times (nytimes.com)

While the success or failure of our outlook does not hinge solely on the economy, a soft-landing would reinforce our broader view of a successful US stock market.

The most hawkish (re: wanting of rate hikes) Fed member James Bullard is retiring from the Fed. While he was not a voting member, one could potentially read into this as a positive signal, as perhaps more dovish (re: wanting to stop or curtail rate hikes) Fed members are gaining more clout on the FOMC.

JP Morgan was among the first of the US banks to provide quarterly earnings details last Friday. Their earnings beat estimates handily, and while Jamie Dimon was slightly cautionary in his remarks, he has also had a penchant for being quite pessimistic over the last year or so.

The Atlanta Fed’s GDPnow tool is forecasting growth still being in the mid-2% range: GDPNow- Federal Reserve Bank of Atlanta (atlantafed.org)

We remain cautiously optimistic that the short-term and long-term trends of large-cap growth and tech outperformance remain intact. However, we have been increasingly encouraged to see smaller cap indices such as the Russell 2000 growth index, begin to participate more.

Year-over-year percentage change in consumer sentiment (University of Michigan survey) has clocked in at the highest levels since 2012, after the great financial crisis; which is yet another sign that we may be early in a bull market.

As we had been expecting to the be the case, there has been an uptick in hedge funds’ short positions in the S&P 500 futures “closing” (i.e., the hedge fund not betting against the market anymore); an indicator that bearish investors could be “throwing in the towel” by either going long, or at least eliminating their short bias.

Russia has pulled out of the Black Sea Grain deal. Unless a replacement solution is found, this news item warrants consideration for future inflation. While headline CPI is 14% tied to food, there is no food measure embedded within core-PCE, the Fed’s preferred inflation metric.

Earnings are still expected to shrink in the high single-digits this quarter, year-over-year. So if we get numbers that are soft, but not terrible, the market rally is set to potentially continue.

As always, please do not hesitate to reach out to us with questions. Thank you for your trust and confidence.

John Bay, CFA, UCLA MBA

Chief Market Strategist

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