Q2 earnings season is off to a strong start.

So far, about 60% of the S&P500 companies have already reported quarterly earnings. Nearly 90% of them beat analyst estimates according to FactSet. And the fun has only just began.

Investors are impatiently waiting for stocks like Moderna, Beyond Meat, Uber, General Motors, Under Armor, and many other popular names to report stellar profits in the next few days, adding more fuel to the greatest stock market rally in history.

The S&P 500 index and the tech-heavy Nasdaq are both near record levels, thanks to robust earnings and renewed optimism about the US economic recovery.

The expected earnings growth for S&P500 companies is tracking toward 85% which is the biggest jump since 2009.

Quite frankly, it’s looking more and more like we are at the beginning of a multiyear boom.

Of course, it’s not all rosy, the markets have been choppy and from time to time, stocks suffer because of bad news like renewed fears of lockdowns, or concerns that the delta variant will lead to another economic slowdown, or supply chain issues, or inflation pressures, but the next day, buy-the-dippers and bargain hunters charge back, propelling markets back higher.

At the same time, analysts are flooding the markets with “buy” recommendations like never before! Data from Morgan Stanley shows that buy ratings on stocks have reached highest levels in 20 years!

In other words, everyone is expecting a bright outlook, and more record corporate profits, not only for Q2, but also for the second half of 2021, and maybe even Q1 of 2022 according to most analysts.

The analyst community is expecting higher stock prices. And the investing community is buying, and buying, and buying.

That’s the reality today. But the question everyone is asking is: should we expect a major correction?

Looking ahead, and we don’t know if this will take weeks or months, but we think investors are waiting to see if the proposed $1 trillion infrastructure bill passes through Congress, which will inject more money into the economy, and this is good for growth stocks. If it doesn’t, we think this will negatively affect market sentiment and trigger a new round of profit-booking that in turn may translate into a major correction. The Nasdaq Composite index is the most vulnerable in this scenario.

We are also closely monitoring the crude market. If WTI crude oil falls back below the $70 mark on low global demand and weaker-than-expected manufacturing in the U.S. and China, it could put a damper on stock prices.

Last but not least, we are watching the delta variant as it continues to gain traction and may add some pressure to growth and technology stocks. This scenario favors defensive plays such as health care, pharmaceuticals, utilities, and consumer staples.

But at the end of the day, earnings have been, and will always be the main stock market driver on the longer term.

Finally, let’s look at things from a technical perspective.

This Nasdaq 4H chart tells a very optimistic story. First, the tech-dominated index has been trading above the 200-period SMA for nearly 4 months now. Therefore, we think Nasdaq traders have no reason to unload their long positions just yet.

Second, the fact that the index keeps printing higher lows is a bullish signal in itself. And it’s only a matter of time before a new wave of buyers take the Nasdaq to fresh new highs.
So far, every correction seems to be an opportunity to buy. We will only start to worry if the next correction drives the price to lower lows, which is a bearish signal.

Good Trading!

 

Rony Nehme

Chief Market Analyst at SquaredFinancial

Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.

 

 


Disclaimer: This information is only for educational purposes and is not an investment recommendation. The information here has been created by SquaredFinancial’s Research Partners. All examples and analysis used herein are of the personal opinions of SquaredFinancial’s Research Partners. All examples and analysis are intended for these purposes and should not be considered as specific investment advice. The risk of loss in trading securities, options, futures, and forex can be substantial. Customers must consider all relevant risk factors including their own personal financial situation before trading.