This earnings season (Q2) is still very young, but beat rates in both revenue and profits are well above average. Yet share-price reactions to earnings reports may be suggesting that the good news is already priced in – at least in the short-term.
We are seeing quite a bit of intraday selling of stocks reporting earnings, regardless of the earnings result. This suggests investors may be taking profits using a “buy the rumor, sell the news” strategy. Maybe this is an indication of a tired market that needs a pause.
President Trump has kept up the pressure on the Fed: “interest rates must come down,” “we’d do better if we had lower rates,” and that he believes Fed Chairman Powell will “do the right thing” with policy. It is not hard to see that lower rates would drive faster economic growth, though they also risk higher inflation.
Is monetary policy unusually tight right now? The easiest tool to use is to compare the Fed Funds rate to recent inflation trends. Relative to inflation, there is certainly an argument for cuts, but not dramatically lower policy rates. That is especially true given strong financial markets, labor markets holding up, and solid economic growth. The baseline expectation for the Fed should be one cut this year, although there is room for two cuts if labor markets weaken.
Price/earnings ratios for stocks are much less in Europe than the U.S. As a result, many Wall Street analysts are recommending moving money from U.S. stocks to Europe. This has worked so far this year. Most stock markets in Europe have outperformed the S&P 500 this year, although our market is catching up.
Do we think this trend can continue? Yes, this trend may continue in the short term due to the valuation gap. But the U.S. has much more to offer in the longer term, including being the global leader in the development of artificial intelligence. We expect U.S. outperformance will re-emerge later this year or next. After all, the S&P 500 has gained nearly 10x as much as the rest of the world since the end of 1987 (2500% versus 288%, source: Bespoke Investment Group). It is never a good idea to bet against U.S. stocks.
1,000 DAYS AND COUNTING
The current bull market is now an adult crossing over the 1,000 day mark. The average bull market lasts about 1,000 days with an average gain of 114%. This compares to a 78% gain for this bull to date. So we have some catching up to do.
We still expect this bull market to continue, but not without taking a breather after its massive run off the April low. Stocks don’t go up in a straight line, although it may seem that way with the S&P 500 and NASDAQ reaching all-time highs seemingly every day. Maybe underwhelming earnings season stock performance is an indication that stocks need a rest.
We have written numerous times previously about our reasons for staying bullish. Another reason is the surging money supply. Financial markets continue to be awash with liquidity. Money supply, as measured by M2, stands at an all-time high. It jumped 4.5% year-over-year in May. Since 2020, it has risen 45%. One definition of inflation is more money chasing fewer goods. There is certainly more money chasing financial assets today.
There is a lot of market news this week. We have the Fed presser tomorrow about the economy and interest rates, and the July jobs number on Friday. And plenty of Q2 corporate earnings reports.