Central banks all over the world have continued their efforts to combat elevated inflation.
The Bank of England and European Central Bank, among others, have raised key interest rates recently. And here in the U.S., the Federal Reserve “paused” its rate hikes at its last meeting in June.
The fact is that inflation remains stubbornly high overseas, even though it has finally started to taper off here in the U.S. For example, inflation is running at an 8.7% annual pace in the U.K compared to the May Consumer Price Index (CPI) showing a year-over-year increase of just 4%.
The June CPI, set to be released next Wednesday, is anticipated to be very positive. The annual CPI pace is expected to decelerate to 3% or less in June of 2023. The Fed’s inflation target is 2%.
I personally think the Fed should continue to hit the “pause” button in July, but as the Federal Open Market Committee (FOMC) meeting minutes from June show, better-than-expected economic data may lead to another rate hike (or two) this year.
In today’s Market 360, we’ll discuss the what the FOMC minutes revealed, the market’s reaction… and my outlook no matter what the Fed does when it meets at the end of the month.
June Fed Minutes Reveal Hawks Are Still Circling
Yesterday, the Federal Reserves released the minutes from their meeting in June. And while the Fed paused rates at its June meeting, the minutes revealed the likelihood of more rate hikes in the coming months.
According to the Fed minutes, some officials favored raising key interest rates by 25 basis points, citing a tight labor market, strong economic activity and continued high inflation.
Some, however, is not the majority.
The minutes also revealed that “almost all participants judged it appropriate to maintain the target range at 5.00%-5.25% at this meeting” in order to give them time to better assess the impact of their tightening policy on the economy.
Fed economists also reaffirmed their expectation of a mild recession later this year.
The minutes stated:
Given the continued strength in labor market conditions and the resilience of consumer spending, however, the staff saw the possibility of the economy continuing to grow slowly and avoiding a downturn as almost as likely as the mild-recession baseline.
The fact remains, the minutes revealed a more hawkish Fed than expected. A hawkish Fed spooked Wall Street, triggering a late-afternoon selloff Wednesday afternoon. As a result, the Dow and S&P 500 broke their three-day win streak yesterday after the minutes were released.
That said, it’s important to note that there are outspoken doves on the Fed. The Chicago and Atlanta Fed Presidents don’t want to raise rates – and they’ve been very vocal since the last meeting.
While this isn’t what we were hoping for, hang in there, folks…
Earnings Season is Coming
The fact is, we’re going to be treading water till we get the CPI report for June next week. As I mentioned, I’m expecting the annual pace inflation will decelerate from about a 4% annual pace to 3% or less.
However, the big news for us is earnings.
The second-quarter earnings season will kick off next week, and right now, second-quarter S&P 500 earnings are forecast to decline an average 6.5%. But given the fact that the analyst community has revised estimates higher, and companies often exceed estimates, I expect second-quarter earnings growth to be much better than the current forecasted 6.5% decline.
And the third and fourth quarter of 2023 are looking even better.
According to FactSet, the S&P 500 should report 0.4% average earnings growth and 1.1% average sales growth in the third quarter. Fourth-quarter estimates are even better, with the consensus estimate calling for 7.9% average earnings growth and 3.2% average sales growth. As a result, the S&P 500 is also expected to achieve 0.9% average earnings growth and 2.4% average sales growth in calendar year 2023.
Look, I know you don’t like volatility like we are seeing today. The silver lining is if you’ve been waiting to buy certain stocks, I think the next couple weeks are going to give you a pretty good opportunity to do just that.
Bottom line: I expect a strong earnings season to help the market bounce back and for fundamentally superior stocks – like the ones on my Growth Investor Buy List – to emerge as the market leaders.
Last Friday, I recommended two new stocks to my Growth Investor readers that are poised outperform as we head into the second-quarter earnings season.
(Already a Growth Investor subscriber? Go here to access your subscription.)
Sincerely,
Louis Navellier
