Earnings Season is Not Killing Stocks

Earnings season is not killing stocks, small caps roar back, and doubt about our economic growth model is no reason to abandon stocks.

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Earnings Season is Not Killing Stocks

A few weeks ago, bears warned that if you thought the stock market had been rough this year through June, just you wait until second-quarter earnings stink and the bottom falls out.

Well, we’re a couple of weeks into it and all is well.

Plenty of positives: IBM and Johnson & Johnson both beat on the top and bottom lines in the second quarter.

This is not to say that earnings have been stellar. Plenty of bad news:

  • IBM reduced its cash flow guidance.

  • J&J cut its fiscal 2022 outlook.

  • Apple plans to slow hiring.

  • Beyond earnings, housing starts dropped 2% in June, a 9-mo low. Higher mortgage rates weigh on the homebuilding sector.

But in a way it’s more encouraging that stocks are holding strong despite the presence of bad news. It suggests that bulls were right last month when saying that bad news is priced in.

Look at the stabilization.

Stocks bottomed in June and have gone sideways for more than a month:

  • S&P 500 bottomed on June 16. Recovered 7.4% since then. Today at the same level it was on June 10.

  • S&P 400 bottomed on June 16. Recovered 7.9% since then. Today at the almost same level it was on June 10.

  • S&P 600 bottomed on June 16. Recovered 8.1% since then. Today at the almost same level it was on June 10.

  • Nasdaq 100 bottomed on June 16. Recovered 10.1% since then. Today at the same level it was on June 9.

Not bad!

The big inflation report for June is on the books, bad company news is flowing (mixed with good news), but stocks are holding up.

Maybe the bad forecasts did their work ahead of time, after all.

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Small Caps are Roaring Back

Small caps may finally be getting their time in the spotlight.

Yesterday, the S&P SmallCap 600, the small-cap index I prefer and which we use in the 3Sig plan, posted a 3.5% gain. In a broad rally that saw the S&P 500 gain 2.8%, small caps led the pack.

They looked undervalued in February. It’s time for catch-up.

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Trading Growth for a Steady State Economy

Every once in a while, I’m asked whether I think a forever growing economy is possible, and whether we’ll reach the end of growth soon.

For example, I recently received a question from a long-time reader in Switzerland, about Europe’s growth model and whether it could damage the value of stocks for the long haul.

In The New York Times Magazine this week, David Marchese interviewed Herman Daly, emeritus professor at the University of Maryland School of Public Policy, and a former senior economist for the World Bank.

He’s 84 years old, and for the past 50 years has been questioning the wisdom of prioritizing economic growth.

This is an important discussion, but not a new one. It’s been going on for at least 50 years. There’s no reason to think a big change is imminent, nor that if it finally happens it would doom stocks.

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Links to Resources Mentioned

 

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