Many traders are unsure of what they ought to anticipate and understand when it comes to supporting the US stock market. They are unsure whether to pay heed to economic data weakness and deterioration, poor profits, recessionary concerns, aggressive Fed monetary policy, or, most importantly, the prospect of another big financial catastrophe. For them, the unknown exists, and there is a big disconnect between the US equities market and what statistics and economic fundamentals imply.
Let’s start by looking at the current earnings season in the United States. So far, US corporations that have reported profits have done better than many expected. This is true when we look at the US banks that have reported as well as the US tech behemoths like Microsoft, Amazon, Intel, and others. There has been so much dread and concern among traders and investors heading into this earnings season that it will be a total catastrophe owing to the downturn in US economic growth. Traders expected this earnings season to knock the US equities market off its perch. In reality, so far, we have seen that banks have delivered not-so-bad results; in fact, their trading income has remained consistent. They are slightly gloomy about the future, but they are certain that they have enough cash to deal with the unknown. Although the earnings of Frist Republic Bank, a US regional bank, suggested many investors be cautious about their risk tolerance, depositors are concerned about keeping their money at US regional banks after the collapse of a number of high-profile banks and forced bank mergers in Europe. First Republic’s earnings pushed traders over the brink once again.
Nonetheless, the US tech titans aided in restoring their confidence this week by providing a plethora of reasons why traders should favour riskier assets. For example, Amazon’s profits, which are extremely susceptible to consumer spending and US economic development, were much higher than predicted. Similarly, Meta stated in its report that its advertising income has returned and that the company’s recent layoffs have aided its top-line profitability metrics. All of this contributed to the Dow Jones Industrial Average posting its greatest one-day percentage rise since January.
However, there are some investors who remain concerned and perplexed when they begin to look beyond earnings and focus on fundamentals, which pose a significant threat to everything and the unknown. They are concerned about the stickiness of US inflation statistics, the Fed’s choices, and the ramifications of those options if they are used. Speculators, on the other hand, say there is little cause for concern. This is due to their belief that any negative news is good news for the US stock market. They believe that any worsening in the US equities market or economic conditions would only increase regulators’ and the Fed’s support. For example, the US printed a dismal GDP result yesterday, one that was significantly less than expected (actual increase q/q GDP: 1.1%, forecast: 2.0%), and the US stock indices posted strong gains yesterday. Traders that are hopeful about a dismal scenario feel that with economic statistics like this, the Fed will be compelled to stop interest rates for some time before they can begin decreasing them again.
The point to remember here is that it is not as easy as that. To begin, the Fed is under immense pressure to do more to reduce inflation owing to its intransigence. This implies that, in actuality, the Fed is likely to raise interest rates at least twice more this year, for a total interest rate rise of 50 basis points.
So the bad news is not good news because the current economic data is going to worsen. The US labour market, which is now strong, is expected to endure instability as corporate activity weakens, further lowering consumer morale. Above all, any additional potential increase in interest rates will provide more tailwinds to those traders who believe the US banking system is in trouble and that the current cascading of the US banking system will continue.
