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Stocks are rising, but gains could bring them back down to earth

Things on Wall Street and Main Street seem to be heading in opposite directions. The


S&P500 Index

returned to a record high of 1%, while the University of Michigan’s latest reading of consumer attitudes toward the economy fell to a six-month low. In this tale of two stories, is this the best or the worst of times?

As for Jane and Joe, their sentiment fell sharply in Michigan’s preliminary reading to 67.4 from 77.2, the highest since November, which coincided with a late October stock selloff, notes Ian Lyngen, chief interest rate strategist at USA at BMO Capital Markets.

By comparison, the large-cap benchmark has returned about 10% this year. At the same time, consumers’ inflation expectations increased. They expect prices to rise 3.5% over the next 12 months, compared to 3.1% in last month’s survey. Their five-year expected inflation rose to 3.1% annually from 3.0%.

Meanwhile, corporate stocks recovered thanks to help from both sides. The current earnings season is seeing good reviews and interest rate concerns have subsided. In the latter case, Federal Reserve Chairman Jerome Powell effectively sidelined possible interest rate increases from discussion, while federal funds futures are again pricing in two possible quarter-point cuts by the end of the year, according to CME’s FedWatch website.

On the earnings side, J.P. Morgan global market strategists wrote in a May 8 note that S&P 500 reporting companies beat first-quarter forecasts by 9%, which they consider less than impressive given that actual results were lower compared to the previous year and the year before. quarterly profits. Moreover, they call analyst forecasts of 17% growth in the fourth quarter over the first quarter “very optimistic” because the forecasts assume high revenue growth or margin expansion. The bank’s strategists believe mid-single-digit growth of around 5% for the rest of the year is more likely.

According to Strategas strategists Jason De Sena Trennert and Ryan Grabinski, earnings disappointments are also expected if the Fed does indeed cut interest rates. The Fed’s easing of monetary policy typically comes with economic and market stress, they write in a client note. Historically, S&P operating profits have fallen by about 10% in the 12 months following initial downgrades. “In short, be careful what you wish for when it comes to monetary easing,” they conclude.

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In the period between the last Fed hike and the first rate cut, defensive groups have historically led the way, add Evercore ISI strategists led by Julian Emanuel. Prominent among them are utilities stocks that have surged after an extended period of poor performance, they wrote in a client note Friday. The group became further convinced by the notion that the AI ​​revolution would require vast amounts of energy (as will electric vehicles, I might add).

Anyway


Tools Select SPDR sector

Over the past three months, the ETF has returned 19.34%, according to Morningstar data. Higher prices have pushed the dividend yield – traditionally the group’s biggest attraction – below the yield on benchmark 10-year Treasuries, writes colleague Jacob Sonenshine. He suggests that maybe it’s time to pull the plug.

write to Randall W. Forsyth at [email protected]