Last week was a perfect representation of this market since the U.S./Iran conflict started,
as the majority of the headlines were “negative” including 1) No progress on a ceasefire, 2)
Higher oil prices, 3) Rising bond yields, and 4) More evidence of extreme
optimism/exuberance in tech, but they were all offset by very strong tech-related earnings
(CSCO, AMAT) and solid economic data.
Friday also provided a warning that, at these stretched valuations, the headwinds are
getting stronger, and if we get any disappointing earnings or hints of stagflation, then a
sharp pullback will happen. Put differently, this market is facing real problems. High energy
prices, rising inflation, possible rate hikes, extremely thin leadership, tech stock
exuberance, and higher yields are all things that could cause pullbacks by themselves.
And just because the market has rallied, it doesn't mean there aren’t problems. However,
those problems have been overshadowed and offset by extreme earnings growth and solid
economic data, and that was true last week as well, until Friday, when spiking yields and
oil were simply too much.
With this number of headwinds on stocks, a sustainable path higher is hard to imagine,
unless it’s driven by sheer irrational exuberance in tech names. Instead, investors should
hope that continued strong earnings (and there are a lot this week) can help support stocks
around current valuations until those headwinds are reduced, which would then free the
way for a move higher.
Bottom line, there are problems facing this market, but they’ve been offset by earnings and
growth. If either of those two disappoints, this market will pull back (likely around 5%).
However, if earnings and economic growth stay stable, then investors can wait for the
headwinds to drop off, and as that happens, the path higher for the broader market (and
not just tech) will open up.
Important Earnings to Watch This Week Nvidia (NVDA), which is still the most important
stock in the market, reports earnings on Wednesday night, and those reports need to be
strong to support the broader market. But NVDA isn’t the only important company
reporting this week. Key consumer names HD (Tue), LOW, TGT, TJX (Wed), WMT, DE (Thu),
and BJ (Fri) will give us important anecdotal insight into the state of the consumer, while
software names (INTU on Wed, WDAY on Thu) could exacerbate or push back on software
concerns. It’s not an exaggeration to say strong earnings are the most important reason the
S&P 500 is up so strongly YTD. So, earnings this week need to stay strong to help keep
these gains amidst building headwinds.
All of this is short-term thinking, but it may be the thrust needed to get through a mid-term
election year. I still believe we will continue to get some volatility as we get closer to the
election.