There is another flood of earnings reports due this week, which will likely produce plenty more volatility in the market.
However, by the end of the week, we will have the results of more than 30% of the companies in the S&P 500. That’s usually enough to know what to expect for the rest of the season.
You wouldn’t know it by looking at the massive 2.77% loss last Friday, but earnings have still been better than expected so far. Growth is positive compared to the same quarter last year, and average revenue (this is sometimes called “total sales” or “top line”) is up more than 9% from last year.
The spoiler still seems to be inflation fears, but earnings are good because companies have been able to pass along price increases to customers. In turn, customers continue to buy, and demand seems strong. So, what’s tripping up the market is the if this trend will continue in Q2.
This is exactly the situation we were in during January’s earnings season. The numbers were good, demand was strong, and the outlook was positive, but investors were worried that inflation would ruin things in the first quarter, so stock prices remained low.
The question at this point is whether investors will continue to bet against the market fundamentals and keep prices low… or if the market will rally.
Historically, periods like this resolve with a rally, not a bear market.
Since we don’t have an inflation crystal ball, we are going to go with the historical precedent and keep our outlook bullish.
On Our Watchlist
Recently, we have been putting more emphasis on consumer defensive (AKA “non-cyclical”) companies, and we think this is still the sector to focus on. However, we must be careful about defining what qualifies a stock as defensive.
We still think the discount retailers are the best buy in the defensive sector right now, even though prices are a little elevated. Dollar General (NYSE:DG), Costco Wholesale (NASDAQ:COST), and Target (NYSE:TGT) are at the top of our watchlist as companies best able to avoid short-term damage from inflation and benefit from strong demand.
The market-wide decline has increased the share prices of the best discount retailers back to a more reasonable level, and we think they are setting up for a great bounce through the month of May.
Earnings reports will continue to stream in this week.
The news has been good so far (even if you can’t tell from the market’s reaction) but there are some key reports to watch.
Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), and Amazon (NASDAQ:AMZN) will all be reporting later this week, and if they disappoint, we may have to adjust our bullish outlook.
On the bright side, these stocks are wildly undervalued, so the bar to beat expectations is low.
In our view, a surprise seems likely… and that should send the market back up.
Make sure you tune in tonight on Learning Markets for our free livestream.
We’ll discuss falling gold prices and the implications thereof, the impact it will have on inflation expectations, and more.
Go here to set a reminder, and we’ll see you tonight.