Earnings season is underway, and so far, corporate outlooks remain relatively upbeat, suggesting the economic cycle might improve. While it is too early to tell for sure, as we will discuss in more detail today, some evidence may support that view and the potential for the market to eclipse all-time highs by next year.
As we enter Q2 earnings season, we will discuss profits, earnings, and stock market returns in greater detail in the coming weeks. However, the big news this past week was the drop in the CPI inflation gauge, which sent stocks higher, breaking out of the recent trading range over the last couple of weeks.
This week's economic data sent confusing messages through the market. A stronger-than-expected ISM Services number suggests that no recession is on the horizon currently. As noted in the chart below, there has never been a recession since the turn of the century when services (which comprise 80% of the economy) are not in contraction.
Despite the recent correction, complacency remains highly complacent. Last week we noted that the correction had triggered a market sell signal. As stated, when triggered from relatively elevated levels, these sell signals suggest a more protracted correction or consolidation. However, the correction was shortlived as a successful test of the 20-day moving average brought traders back into the market. In a bullish advance, it is not uncommon for buy and sell signals to flip back and forth at elevated levels.
As stock prices continue to push higher, investor and consumer sentiment indexes have also risen. As we will discuss in today's commentary, such should be expected. However, that increase in the sentiment index is also working against the Fed. Such is something Jerome Powell noted this past week during his testimony before Congress. Combined with the Fed's comments that more rate hikes are likely coming, continued weak economic data and persistent inflationary pressures weighed on the markets this week. As noted last week, such was unsurprising.
This bullish market is getting harder to deny as many indicators continue to improve. Last week, we reviewed our previous commentary discussing that the break above resistance would suggest a continued move to our target of 4300.
Last week, we touched on the current bifurcation of this rather lopsided market and suggested sector rotations are likely. The chase for anything "artificial intelligence" related has heated up recently, and deviations from moving averages are now more extreme.
You can't turn on the media or pick up the newspaper without a headline discussing "artificial intelligence." It is certainly reminiscent of the 1999 "Dot.com" chase if you remember that experience.
Analysts are full of economic possibilities, from hard landing to no landing scenarios, but what about a soft recession? As noted last week, with earnings season mostly behind us, reported earnings came in "better than expected." Such put Wall Street analysts in an optimistic mood hoping the worst is behind us.