The first half of 2022 was awful for stocks. But investors have seen a rebound in July and the markets are currently enjoying their best month of the year.
So far in July, the Dow is up 3.9% so far, the S&P 500 has jumped 4.8% and the Nasdaq has soared nearly 7% — putting that index within striking distance of its best monthly gain since November 2020.
Will the good times last?
A deluge of data lies ahead this week, including earnings from Google owner Alphabet (GOOGL), Microsoft (MSFT), Facebook parent Meta Platforms, Apple (AAPL) and Amazon (AMZN). The market is pricing in decent, if not spectacular, results from the Big Tech companies.
"Investors should be selective when picking stocks within the tech sector," David Trainer, CEO of investment research firm New Constructs, wrote in a report. Trainer recommends investors seek companies with strong cash flows and reasonable valuations, such as Microsoft, Alphabet, Cisco and Oracle.
"It's important for investors to do their homework — diligence matters. Betting on stocks to keep going up just because they've been going up in the past is no longer a reliable strategy," he said.
How much worse will inflation and the broader economy get?
Beyond earnings, this week also brings the latest on interest rates from the Federal Reserve and the gross domestic product numbers for the second quarter later this week.
Another large hike from the Fed and anemic GDP growth are expected. But if the news is worse than forecast on either the economic or Fed policy front, this month's market gains could quickly fade.
Conversely, better corporate earnings results as well as any positive signs on inflation and interest rates could keep the market party going.
"Valuations have come down considerably — but you have to square that with the fact that analysts are expecting earnings growth of about 8% this year and in 2023," said Michael Sheldon, chief investment officer with RDM Financial Group at Hightower. "Are earnings estimates still too high? Will those numbers come down?"
The hope, Sheldon said, is that the broader economy will just have "a shallow bump along the bottom and then accelerate." However, he cautioned there are worries that "something more serious is coming."
Adding to the concerns: Fed Chair Jerome Powell still has to "talk tough and say we're not done raising rates yet" as long as inflation remains high, Sheldon said.
But other experts think Powell realizes that if the Fed raises rates too aggressively, the economy could slow more dramatically then the central bank would like. So the Fed may need to halt its rate hikes sooner rather than later.
"We expect the Fed to take smaller jumps in rates and possibly pause before the end of the year as it assesses the ability of the economy to withstand the withdrawal of 'cheap' money," Colin Graham, head of multi-asset strategies at Robeco, said in a report.
Needless to say, this week is a crucial one for Wall Street. Stocks are cheaper now, but there are legitimate concerns about whether there is still more downside in the short-term.
"The market now faces stiffer challenges in the week ahead," Sam Stovall, chief investment strategist with CFRA Research, said in a report. He thinks the July rally so far is "more likely a bear-market bounce than the start of a new bull market."
