US Stock Investors Look to Earnings for Fuel Amid Positive CPI Report
Stock investors in the US are relying on upcoming earnings reports to continue fueling the recent rally in the market, following an upbeat consumer price index (CPI) report. The report showed that consumer prices increased in June at their slowest annual pace since March 2021, leading to hopes that the Federal Reserve will soon end its tightening of monetary policy. These positive inflation figures, combined with a robust labor market, are boosting the confidence of investors who believe the economy is in a Goldilocks scenario of cooling inflation and steady growth, providing a positive backdrop for stock performance.
Despite the optimism, the upcoming earnings season will put this belief to the test. The recent rally has pushed the S&P 500’s valuations significantly higher than historical levels, increasing the pressure on companies to report strong results that can justify their current stock prices. With higher valuations, expectations have grown, making the market more sensitive to earnings announcements. The S&P 500 currently trades at a forward price-to-earnings ratio of 19.2 times, compared to its long-term average of 15.6.
The earnings season kicks off on Friday, with reports from major banks and UnitedHealth Group expected to provide insights into second-quarter performance. Analysts predict that second-quarter earnings will have dropped 6.4% compared to the same period last year.
Following the release of the CPI report, the stock market extended its rally, with the S&P 500 rising by 0.8% in afternoon trading. Treasury yields also fell as investors interpreted the cooler CPI numbers as a sign that the Fed may no longer hike rates. Some investors, however, remain cautious about Treasury yields, as they have been steadily rising in recent weeks. The increase in yields is primarily driven by the improving economic outlook. Investors believe that as long as this outlook is supported by strong corporate guidance, the stock market can continue to rise.
Nevertheless, some investors believe that the full impact of the Federal Reserve’s rate hikes has yet to be felt in the economy, and they remain wary of a potential downturn. Senior equity portfolio manager Bryant VanCronkhite has been cautious about stocks reliant on economic growth and has instead chosen to overweight defensive sectors such as consumer staples. He believes that true data and evidence from company reports will provide insights into which camp is correct.
In conclusion, US stock investors are banking on the upcoming earnings season to provide further momentum for the recent rally. The positive CPI report and resilient labor market have increased optimism about the economy. However, the high valuations of stocks have raised expectations for strong earnings performance. Investors remain attentive to Treasury yields and their impact on the market. The upcoming earnings reports will shed more light on the state of the economy and the trajectory of the stock market.
