Continued Earnings Surprises Will Lead To A Sustained Rally

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In his Daily Market Notes report to investors, Louis Navellier wrote:

Positive Sentiment

June retail sales were stronger than expected, easing recession fears. Stocks rallied on the resilient consumer as retail sales rose 1% in June, ahead of the 0.9% estimate, and a nice bounce off the -0.1% of May, albeit if adjusted for inflation it was arguably slightly negative.

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Also bouncing was the July consumer sentiment numbers, which were better modestly across the board, with lower expectations of inflation and a nice jump in the Current Conditions from 53.8 to 57.1, well ahead of the forecast of 52.5. Also very strong was the NY Empire State Mfg Index at 11.1 which was -1.2 last month and forecast for -2.0. Early indications from Amazon’s Prime day sales were  $11.9B, up 8.5% over last year.

The consumer is stronger than the Bears have expected and other sentiment surveys have indicated.

Double-Edged Sword

The low unemployment numbers and high cash balances in checking accounts are leading to more spending and not being slowed down by the high inflation trends. It’s a double-edged sword inasmuch as it will also give the Fed more conviction to chase inflation with quicker increases in Fed fund rates.

Interest rates are down a couple of basis points this morning with the 10-year at 2.93% and the 2-year at 3.13%, still inverted but less so than earlier in the week.

Sustained Rally?

Perhaps more important is that the resilient consumer gives optimism to the earnings season.  So far, with 35 companies reporting, 71% have beaten estimates, down from 77% in Q1, and the average beat has been 4.3% less than half the 8.9% in Q1.

Today, Citigroup Inc (NYSE:C) beat handily on both top and bottom and the stock is up almost 10% and leading to a rally in bank stocks, albeit off 52-week lows for many which have been under pressure due to the inverted yield curve which challenges interest spreads for lenders.

Crude oil is higher but is challenged by the lower futures prices. Volatility remains high but today it’s strongly to the upside and we may end up even for the week in the Dow. Only utilities are in the red today. The VIX is down nearly 6% to below 25, a bad day for Bears.

If earnings surprise to the upside in the next couple of weeks, we should see a sustained rally.

Coffee Beans

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