US stocks are on the brink of reaching a record high, and the future looks even brighter for corporate America. However, investors are now anxiously waiting to see how the Federal Reserve’s actions will impact the stock market’s bull run.
With signs that inflation pressures are finally easing, the S&P 500 Index is just 5.4% away from its all-time peak. This sets the stage for a potentially bullish period, but the central bank meeting this week will be crucial in determining whether a recession is looming.
The concern lies in the possibility that a strong labor market will prompt policymakers to signal further tightening beyond the expected rate hike this week. This could jeopardize Wall Street’s profit forecasts, particularly for high-flying tech shares that have been instrumental in this year’s market rally.
Ed Clissold, chief US strategist at Ned Davis Research, warns that the risk lies in the Fed feeling compelled to accelerate the tightening cycle. Such a move could prove to be a policy mistake that everyone has been wary of.
Investors are bracing themselves for a busy week on two fronts. Around 170 companies in the S&P 500, representing approximately 40% of its market capitalization, are slated to report earnings. Tech giants such as Microsoft, Meta Platforms, and Google parent Alphabet are among the bellwether companies announcing their results.
However, Wednesday’s Federal Reserve meeting could be pivotal. The central bank is expected to raise its benchmark interest rate to a 22-year high, followed by Chair Jerome Powell’s press conference. Powell’s remarks could indicate the possibility of an additional rate hike, a scenario that could halt economic growth and disrupt the current bullish sentiment in the market.
Brian Frank, portfolio manager of the Frank Value Fund, is positioning himself defensively due to his belief that a recession is imminent. He advises investors to consider buying beaten-down energy and utility stocks. Frank emphasizes that economic downturns often catch people off guard, with many initially dismissing them as a mere soft landing before a recession eventually takes hold.
Dennis DeBusschere, founder of 22V Research, however, sees strength in the housing sector as counterarguments to bearish views. US homebuilder sentiment has recently reached its highest level in 13 months, which bodes well for investors awaiting the release of the second-quarter gross domestic product (GDP) report later this week.
DeBusschere points out that the most interest rate-sensitive sector, housing, has already stabilized and is bolstering GDP growth after experiencing significant drag last year. If this sector continues to improve, it becomes challenging to rely on the lagged impacts of tightening policies to justify bearish outlooks.
This week, investors will also closely monitor the employment cost index, which provides insights into wages and benefits, as well as the personal-consumption expenditures price index, the Fed’s preferred measure of inflation. The data from these reports will help determine if the central bank will favor another rate increase at its September meeting.
Despite ongoing uncertainties, one thing is certain: the earnings outlook is constantly improving. While S&P 500 firms are predicted to experience a third consecutive quarter of profit drops, excluding the energy sector, which performed exceptionally well in 2022, earnings are expected to improve in the second half of this year.
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, highlights the considerable improvement in earnings compared to the expectations priced into the stock market last year. She believes that relying solely on the economy as a forecasting tool for the stock market can be a tricky endeavor.
The Financial Conduct Authority does not regulate some forms of buy-to-let mortgages.
[Earnings have improved considerably relative to what was priced into the stock market late last year, said Gina Martin Adams, chief equity strategist at BI. Using the economy as a forecasting tool for the stock market proves to be a really dicey business.]
