Investor Alert: Earnings Season and Federal Reserve’s Rate Hike Decision in Focus
Introduction
The current market conditions for the S&P 500 (SPY) are bullish, with investors showing a strong interest in the best stocks. As quarterly earnings season kicks off and the Federal Reserve prepares for its next rate hike decision, it’s important to assess how these events will impact the market outlook. In this article, we will explore recent price action, earnings performance, and the potential implications of the upcoming rate hike decision.
Recent Price Action
The recent price action has been described in different ways – some term it the “FOMO rally,” while others see it as a meltdown with minimal ups and downs. The reality is that the market has been steadily moving upward, and investors need to identify the best-performing stocks. Earnings season provides valuable insights into the health of these stocks.
Insights from Earnings Season
According to Nick Raich from earningscout.com, 11 out of 16 S&P 500 companies that reported beat their second-quarter 2023 earnings per share (EPS) expectations. However, only 9 of them exceeded their sales targets. So far, the results of 77 S&P 500 companies indicate that 78% have exceeded their EPS estimates, slightly below the three-year average. On the other hand, only 62% have exceeded their sales goals, well below the average. It is worth noting that 51 of these companies saw their third-quarter 2023 EPS estimates being cut after the report.
The market multiple has risen to 21.07 times its FY2023 EPS estimate as S&P 500 EPS expectations fall and the price rises. While this increase in the multiple can be justified by research, it also presents a risk of a reversal if estimated trends do not continue to improve. Therefore, it is important to look beyond surface-level earnings headlines and focus on the future prospects of these stocks.
Implications for the Market Outlook
Despite the recent rally and positive earnings headlines, it is crucial to consider the long-term implications. With 66% of companies cutting their third-quarter estimates, there are question marks regarding the sustainability of the buying activity. This, combined with the not-so-impressive earnings results and relatively high valuations, could lead to a period of consolidation or a modest pullback in the market.
While this doesn’t necessarily mean a bear market, it is common for the market to experience a two-step-forward, one-step-back dance or a digestion phase after a significant rally. Therefore, it is reasonable to expect a period of consolidation below $4500, accompanied by a potential 3-5% pullback before the next rally. It is also important to keep an eye on the upcoming Federal Reserve meeting on July 26, as it will influence the market outlook.
Federal Reserve’s Rate Hike Decision
As the Federal Reserve prepares for its rate hike decision, investors are eagerly waiting to see how it will impact the market. While a 25 basis points rate hike is widely expected, the focus will be on statements about future rate hikes and the commitment to maintaining rates until 2024. Any signs of a more moderate incline in rate hikes would be favorable for the stock market, while a commitment to the planned rate hikes could potentially spark the pullback mentioned earlier.
Conclusion
In conclusion, the current market conditions are bullish, driven by positive earnings headlines and signs of declining inflation. However, investors need to look beyond surface-level indicators and focus on future prospects. With a majority of companies cutting their third-quarter estimates and relatively high valuations, a period of consolidation and a modest pullback in the market are to be expected. The upcoming Federal Reserve meeting will also influence the market outlook, with investors closely watching for any changes in the commitment to maintaining rates. Regardless of the market direction, it is crucial to identify the best investments to navigate these conditions successfully.
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Why is the S&P 500 (SPY) in the lead? And what clues do we have about what the actions will do next? Steve Reitmeister shares the answer to these timely questions, including previews of the 4 ETFs and 5 stocks he’s recommended to investors right now. Read below for the full story.
Earnings season is heating up and will take center stage for a while until the spotlight turns to the Federal Reserve for its next rate hike decision on 7/26.
So let’s take a look at these two major events to see what they mean for the market outlook.
market commentary
First, let’s quickly check recent price action.
Some are calling it the FOMO rally as more bears throw in the towel and hit the buy button. While others call it a meltdown, since it never goes up very much at any given point…but it doesn’t seem to go down very much either.
No matter what you want to call it… the conditions are bullish and investors need to invest in the best stocks. Gladly, quarterly earnings season provides an important health check to tell investors what the best stocks really are.
Let me share the insights of my longtime colleague, Nick Raich, who does a stellar job breaking down the earnings outlook at his company. earningscout.com.
This is what Nick had to say on Thursday morning:
- “11 of the 16 S&P 500 companies reporting this morning beat their second-quarter 2023 EPS expectations, but only 9 beat their sales targets.
- So far, we’ve compiled Q2 2023 results for 77 S&P 500 companies.
- 78% have exceeded their EPS estimates, slightly below the 3-year average of 80%.
- Only 62% have exceeded their sales goals, well below the average of 73%.
- After the report, 51 of the 77 companies have seen their 3Q 2023 EPS estimates cut, by a slightly higher amount than last earnings season.
- The market multiple has shot up to 21.07 times its FY2023 EPS estimate as S&P 500 (TO SPY) EPS expectations fall and the price rises.
- At the bottom of the market on October 12, 2022, the comparable PE multiple was only 15x.
- Our research justifies the increase in the multiple, but if estimated trends do not continue to improve, stocks are at greater risk of a reversal.”
I highlighted the 3 key bullet points. Right now, investors are quite euphoric given the price action based largely on signs of declining inflation, which should prompt the Federal Reserve to lower rates going forward. Therefore, investors find it all too easy to celebrate earnings headlines.
The problem with that surface-level focus is that investors have always been better served with a focus on the future. That’s why revisions to earnings estimates tend to be a much better predictor of future stock prices than whether or not they beat past expectations.
So when you see that 66% of companies (51 of 77) are cutting their third-quarter estimates, you question how rampant buying activity should be at this point. That is especially true when combined with the other 2 bullets I highlighted that show valuations are not cheap, which could mean a future pullback.
No… I’m not saying go back to the bear market. It’s just that the market often does a two-step forward, one-step back dance. Or what others consider the digestion phase after a big meal.
So given the big rally in question and the not-so-impressive earnings results, I think we are setting ourselves up for at least a period of consolidation below $4500…and perhaps a modest 3-5% pullback to rest before the next rally. And potentially that pullback started on Thursday because of one of the biggest daily sell-offs in a long time.
Also, the upcoming Fed meeting on July 26 will influence the market outlook. It is a foregone conclusion that they will increase rates by another 25 basis points. However, more and more investors think that this will be their last rate hike given the steady decline in inflation found in this month’s CPI and PPI reports.
Investors will be very interested in statements about how many Fed members think more rate hikes will be needed. And if there is any change in its commitment not to lower rates until 2024.
Any sign of a “moderate incline” in the announcement will be quite favorable for the stock. While any sign that they are sticking to their rate hike plans could be the spark for that aforementioned pullback.
Regardless of the direction of the market, our goal is to focus on the best investments to stay on the right side of the action. And that’s exactly what we’ll do in the next section…
What to do next?
Discover my current portfolio of 5 stocks and 4 ETFs that have been carefully selected to outperform the market in the coming weeks and months.
This is all based on my 43 years of investing experience watching bull markets… bear markets… and everything in between.
If you’re curious to find out more and want to check out these 9 handpicked trades, click the link below to get started now.
Steve Reitmeister’s Trading Plan & Top Picks >
I wish you a world of success in your investments!
steve reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Publisher, Reitmeister Total Return
SPY shares were trading at $453.51 per share on Friday afternoon, an increase of $1.33 (+0.29%). So far this year, SPY has gained 19.48%, versus a percentage increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. He is not only the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return Wallet. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
The charge Investor Alert: Focus on Earnings and the Federal Reserve first appeared in stocknews.com
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