US Stocks Up Four Consecutive Weeks

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US stock markets posted their fourth consecutive positive week. The Nasdaq 100 index officially achieved a “bull market” from their June 16th low. Last week the technology heavy Nasdaq 100 finished up 22% and the S&P up 17% off their lows. Both indices have climbed back to spring 2022 levels. None of the major indices have fully recovered to January levels but sentiment and bond yields indicate there is still room on this current bull run.

Most of the positive sentiment from last week came from improving July inflation reports and lower import prices. The Consumer Price Index (CPI) and the Producer Price Index (PPI) reported slower inflation for July, though both remain at extreme levels. The only disappointment across inflation reports was the “core” CPI, which excludes food and energy prices. “Core” remained at the same level as June, at 5.9%. Investors reacted positively in hopes that the Federal Reserve will slow its rate increase program and possibly even reduce rates in 2023.

We note that the increase in stock prices is not because of an improved fundamental outlook. Profit growth estimates for the next four quarters have been sharply reduced in every major index and sector. The second half of 2022 has seen profit growth estimates cut in half, from 10% to 5%, for the S&P 500. The four-week up streak is largely based on interest rates expectations rather than an improved outlook on profitability. However, history shows investor sentiment does not need to be based on company fundamentals and can last for extended periods of time. Therefore, we don’t expect an end to this recovery just yet.

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