This week, one of the big headlines making waves is the latest inflation numbers.
July’s Consumer Price Index (CPI), a common inflation metric, came in at 8.5% – which is lower than the market’s prediction of 8.7%.
As a result, the market rallied hard on the news that inflation may have peaked with June’s 40-year high.
And what we are seeing is the continuation of the Fed’s soft-landing agenda playing out.
The Fed has said it itself; it is trying to cool the economy without plunging the U.S or the world into a recession.
Fed chair Jerome Powell said in July they’re aiming for this soft landing of the U.S. economy – and they’re hoping it’ll be in 2022.
So what we are witnessing right now is the beginning of the final landing phase. And here’s what it means for the market…
Corporate Guidance Is Setting the Scene
We’re amid earnings season right now – when the majority of publicly traded companies release their quarterly earnings results.
So far, most of the companies in the S&P 500 have reported their earnings this season – over 87% as of the end of last week. And by and large, these companies are reporting positive earnings per share (EPS) and revenue surprises.
Of course, some earnings calls have hinted at lower guidance for the next quarter. That means companies are telling the public they are estimating less for the next quarter than they previously thought.
A couple of examples from big tech this week are semiconductor manufacturers Micron (MU) and NVIDIA (NVDA). Both these bellwether tech firms are guiding lower.
And we’ve seen a handful of companies issuing layoffs in recent months as well – including noteworthy names like Robinhood, Oracle, Rivian, Shopify, and Microsoft.
Yet I suspect that these companies are taking advantage of the current down market to trim the fat and realign their strategies.
They’re putting themselves in great shape so that when the next upswing happens… they’ll soar as they outperform what the market expects.
And from what I see, the next upswing could be right around the corner…
September Is Setting the Stage
During this earnings season, people are seeing great companies trading at great deals. And with the news of lower-than-expected inflation, we are seeing capital flowing into the market right now.
This chart shows stock buying and selling. This week alone, we are seeing nearly four times as much buying as we do selling.
I expect we are going to see more people playing catch up like this going forward – especially as the market gets more clarity from the Fed.
In September, the Federal Open Market Committee (FOMC) will likely decide on another 50 or 75 basis point rate hike to finish off the Fed’s plan of economic cooling.
Even a 75 basis point rate hike would bring us to a Fed funds target rate of 3% to 3.25%. That’s still below the average Fed Funds rate of 3.79% over the last 40 years.
Few of us can imagine the Fed raising rates again in November due to the election, which means that rates will stay steady for a while… reassuring the market.
And that will be good news for the stocks…
The Main Act
Right after the September FOMC meeting, we should see all sorts of capital inflows rushing into the growth stocks that have been so beaten down in the first two quarters of this year.
In fact, we are already seeing some of this happening already in a few overpunished stocks…
A couple of examples of this are Trade Desk (TTD) and Progyny (PGNY).
After falling more than 40% this year, they have risen 49% and 48.9%, respectively, since last Thursday – and even more in the past month:
When we see stocks shooting up 30% and 40% in a single day, a lot of that is recovery from being pushed too far down.
Even better, much of the rally we are witnessing right now is genuine buying in good-quality companies with solid fundamentals and growth horizons.
I believe that will continue. This lower inflation number signaled an all-clear to put back on healthy risk and invest in these higher-growth companies.
And this will enable the Fed to announce that it has gotten its soft landing. There may have been a “technical” recession, but it wasn’t a real one.
Where This Leads Us
This has been the Fed’s exact plan with its ghost tightening and soft landing agenda. And that brings us to this recovery we are seeing now.
Throughout the remainder of the third quarter of this year, I see the market bouncing along to a recovery. Then I believe we will rally through to the end of the year.
It is entirely possible that indexes close positive for the end of the year.
And I think that sets up for a tremendous 2023.
A resurgence in some of these high-growth companies that have been taken to the woodshed could easily turn into the beginning stages of the next bull market…
Talk soon,
Jason Bodner
Editor, Outlier Insights