So here’s something I’ve been wondering about the stock market (SPY) lately… maybe you’ve been wondering the same thing. Fundamentals are still mostly negative. Less negative than we thought… but still negative. So why do so many people feel bullish? Read on to find the answer.
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(Enjoy this updated version of my weekly commentary originally published Jan. 24e2023 of the POWR Growth newsletter).
As I wrote in last week’s commentary, the stock market (SPY) is a complicated place to be right now.
There are a handful of potentially positive signals (the recent rally, some major earnings surprises, declining inflation numbers), but there are also still a number of potentially negative signals (more major layoffs, some major missed profits, an aggressive Fed).
If you look at the broad market indices, the bulls seem to be winning this tug-of-war.
And I think that’s because they’ve convinced themselves that the negative is already priced into stocks.
And as much as I’d like to be optimistic (and I can’t ignore those green shoots!)… that’s a dangerous place to invest from.
If this rally is based on the assumption that the negative is already priced in, then…
1) We need other positive news if we want stocks to continue higher.
2) Everyone is in for a very unpleasant surprise if it turns out that the negative has not been priced in.
In that second scenario, we would likely see two waves of sales — a sell-off driven by negative news and a second wave of sellers who sold because they feared the first wave of sellers.
“Almost any pin could puncture such supreme confidence and cause the first rapid and severe decline,” wrote Jeremy Grantham, GMO’s co-founder and long-term investment strategist. “They’re just accidents waiting to happen, the exact opposite of unexpected.”
Now Grantham is one of Wall Street’s best-known bears. In any case, it would be more alarming if he did not call for a serious decline. But his message rings true to me.
They are just accidents waiting to happen.
If we want the bullish atmosphere to continue, the next two weeks will be especially important to get through without incident.
First of all, we need to navigate earnings season, which we are already in the midst of. This season was loaded from the start with many watching to see if a recession is imminent.
In the run-up to the initial reports, many companies have downgraded their own outlooks for the quarter. Of the 101 companies in the S&P 500 (SPY) had issued guidance for the fourth quarter of 2022, 67 had issued negative EPS guidance. That is more than normal based on both the five-year and the ten-year average.
We also see lower profit margins for the quarter, which could be a bad sign if costs continue to grow faster than sales, which is a recent trend. And inventory has proven to be an existing problem for certain retailers, such as Nike and Nordstrom.
In addition, a number of companies are issuing negative guidance and outlooks for the upcoming first quarter.
Then, in early February, we have our next Federal Reserve update. Currently, markets are pricing in a 99.1% chance of a 25 basis point increase.
Now I’m not saying we WILL NOT get a 25 basis point increase… but that’s a perfect example of the pin that could pop the bullish bubble.
Or!
We could easily poke through all these potential pitfalls like some sort of financially minded Mr. Magoo.
Conclusion
I’ll keep a close eye on earnings… just like the rest of the market. If companies continue to outperform estimates or at least continue to provide more positive forecasts than investors expect, we should be able to circumvent any bubbles. Then we move on to the next Fed meeting.
What to do now?
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Best!
Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Growth Newsletter
SPY shares traded at $399.52 per share Wednesday afternoon, down $0.68 (-0.17%). Year-to-date, SPY has gained 4.47% versus a percentage increase of the benchmark S&P 500 index over the same period.
About the author: Meredith Margrave
Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth and POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.
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