Is the ‘High-Risk Bull Market’ Getting Riskier?
Stocks just posted their strongest week since April, thanks to exceptional earnings and renewed momentum in technology. The global economic expansion should continue to roll on, although U.S. and global equity markets remain heavily concentrated in technology/AI. For now, strong earnings are winning the tug-of-war against mounting market risks. The question is, for how long?
Key Takeaways
1. July nonfarm payroll employment fell 23,000, missing the +80k consensus. The average labor wage rate increased only 0.1% m/m, and the unemployment rate fell to 4.1%, the lowest rate in five years.
2. According to Strategas, when payroll growth over a three-month period averages <20,000 jobs (like the last three months), over the next six months the Fed has increased rates only 9% of the time (and cut them 70% of the time).
3. Nevertheless, ongoing positive U.S. growth momentum and the resulting upside risk to inflation may cause market rate expectations to rise further, forcing the Fed to hike rates.
4. Watch what the Fed does with the balance sheet which can impact rates and liquidity more than changes in the Fed funds rate.
5. 30-year Treasury yields bottomed below 1% at the height of the pandemic in 2020. The bear market in bonds is now six years old as yields have crossed above 5%, making the highest level in almost a decade.
6. Headline earnings growth of 49.6% is more than double the inital estimate of 24.4%. Every sector except utilities has exceeded its initial earnings expectation. Revenue growth has also been impressive at 15.1%, up from the initial estimate of 11.7%.
7. It is reasonable to question whether current estimates have become too optimistic. Companies are delivering outstanding earnings, raising guidance, and yet, in many cases, their stocks are selling off.
8. According to Fitch Ratings, the private credit default rate hit a record high in the second quarter, rising to 6% from the previous high of 5.7%.
9. As Ed Yardeni puts it, "It's a tug-of-war between FEMO (fabulous earnings momentum) and (a variety of) uncertainties."
10. Following the top 1% five-day periods (>5% advance) as just experienced in the U.S., subsequent 1-month, 3-month, and 6-month returns average more than double the average return in those periods.
Conclusion
Equities are likely to continue to benefit from economic expansion and rising earnings. At the same time, earnings growth is extraordinarily high and at risk of slowing in the next year, which could prove to be a significant test of investor optimism. Improving economic growth outside the U.S. as the trade disruptions from the Middle East war ease should benefit the more energy dependent market in the rest of the world.
Source: Bob Doll, CTA, PM, CIO, CEO, Crossmark Investments
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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