Yesterday I did my first live webinar where I answered questions directly from retail subscribers. You can access the replay here. I also recently did a video explaining my proprietary Earnings Revision Model which you can access here.

Despite the equity market rally that has followed the sharply lower opening on Thursday to end the week, the S&P 500 was still down since last Friday’s close.  The absolute weakness was broad-based as ten out of the eleven Sectors (GICS L-1) closed in the red with only Staples posting a 0.11% gain.  The headline macro data and news headlines continue to incrementally impact the market in both directions, but my research suggests the bigger picture and issues remain intact — 1) inflation elevated; 2) the Fed still moving towards getting things under control; 3) the U.S. economy is slowing; and 4) corporate profit expectations remain too high and will likely need to be lowered.  I continue to advise investors to spend less time agitating over the day-to-day wiggles and keep their eyes on where we are going, which my research says is likely lower for the S&P 500 until max pessimism gets priced in and we can finally begin looking forward to a more constructive outlook. 

The Wednesday CPI print was an upside surprise and the data showed that a clear deceleration of pricing pressures is not flashing yet.  Thus, the intra-week wiggle was for markets to begin fearing a 100bps hike by the Fed at their upcoming meeting on July 27th.  And despite an also hot PPI data release, comments from Fed Presidents Bullard and Waller caused traders to shift back to a 75bps point move.  So, we are now cheering when the FOMC only tightens by 75bps?  I will have to go back and see when/if that has ever happened before.  Ok, I get it—when there is a drought, we all pray for rain. However, my research is strongly pointing to Chair Powell and Gang in an ongoing battle with inflation that will likely go through year-end, at least.

The negative estimate revision cycle that I have been forecasting has begun, but to date it has been unfolding quite slowly.  I am still expecting it to accelerate at some point, and believe that the process is still in the early innings.  My proprietary revision metrics flag that the “Sick-licals” are going to be hit especially hard as profit expectations are lowered, and it is likely that there is going to be some pain during the earnings season for stocks more sensitive to economic growth. With this being said, I am still looking for my next downside target range of 3600-3500 to be reached, and am moving slowly towards introducing a lower zone for equities to ultimately hit.  So, stay tuned for this in the weeks to come.  Hence, my work DOES NOT support the assertion that bounces are sustainable until negativity reaches an extreme level, and the readings in my indicators show that there is more work to do the reach critical reading.

Headline news today flashed that the consumer is in good shape because the retail sales data release showed an increase in spending.  I am a bit skeptical of this interpretation for a couple of reasons.  First, the data released was nominal and did not consider rising prices, or what we call REAL growth (i.e., taking inflation into account). When the adjustment is made, nominal growth turned into a real decline.  Second, how is the U.S. consumer going to be able to keep spending when real wage growth is negative, cost of living expenses have risen considerably, consumer confidence in several surveys is falling sharply, the job market is slowing on its way to contraction, and the credit card data suggests that consumers may finally be reaching their limits?  Maybe my 2022 bearishness is clouding my judgement, but my indicators say that it’s the bulls that may be a bit in denial.  I guess time will tell.

Bottom Line: Watch overall risk exposure. Downside risk remains. There will likely be a better buying opportunity on the horizon. Be alert for new information that could alter my base case and also expect a high likelihood of a lower downside target then my current target of 3,600-3,500.

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