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It's a BIG week!

| July 25, 2022

As if 4 out of the 5 largest companies in the US reporting earnings this week wasn’t enough, we have arguably the MOST consequential FED meeting of the year. Here are the largest 10 companies reporting this week.

That’s a pretty good group of companies to give you insight into how the economy is affecting their earnings. Now, these are 2nd quarter earnings, so some of the slowing economy may not be factored into these reports. Not to mention, their outlook is always more important than their past numbers. Keep in mind that the one out of the top 5 largest companies (Tesla) reported earnings last week that was better than expected. See the chart below for the market’s response to those earnings.

Of course, the stock is still down from its highs set late last year, but an encouraging development, nonetheless.

In addition to big corporate earnings, we have a couple of economic reports that will likely help inform the FED in its policy decision. Those are:

The most important of those are likely home sales, consumer confidence, and durable goods orders. Numbers that come in weaker than expected will likely give the FED a little more breathing room and may set us up for a relief rally and a run back to the 200-day moving average.

From our friends at SentimenTrader, I have included their Bear Market Indicator chart. As you can see, it is pretty good at noting market tops. It can certainly be early, as in 2008 or in 2019, but does a reasonable job in picking up bullish/bearish market conditions (at least as far as sentiment goes).

The odd thing is, households are still holding a lot of equity, as many do not believe that either a significant downturn is possible, or that the FED will come in and save us (AGAIN).

Now, that’s possible, but as we’ve said so many times, I don’t want to bet on the FED saving investors, because if they don’t the pain is so great. Check out the chart of household asset allocation.

When we are at a market bottom, most allocations will be at lows and many times will be below cash or bond allocations. We haven’t seen that, because rates have been too low for bonds and cash to be reasonable alternatives to equity. This time may be different.

And lastly, I will leave you with a positive opinion from JP Morgan. Their Chief Global Market Strategist, Marko Kolanivic, sees upside for stocks and believes a mild recession is priced in already.

I would actually agree with him, if we have a mild recession. If that’s the case, I also think most of that is priced in. But if we have something more than a mild recession, all bets are off. Here is what the expected FED funds rate looks like going forward.

If the FED follows through on this path (raising short-term rates to 3.8%), I find it hard to believe that we would have a mild recession. But those are just my thoughts. So, it comes down to the tone from the FED on Wednesday. If they are looking to push rates much higher, we likely will not see the rally continue. If they are more dovish, then I think the market can continue up to the 200-day moving average. Your guess is as good as mine as to what they will do.

Until then, have a great week as we enjoy this long-awaited sunshine…and please do reach out with questions, comments, or concerns.