There's still a bull case for the stock market even as inflation runs hot and rates rise
Good morning. I'm senior reporter Carla Mozée writing to you as we head into the back end of the trading week.
Two steps forward, one step back — that summarizes the S&P 500's uneven performance over the past few days as investors have been trying to work out if a sustainable bear-market rally can be formed.
A fear that's kept stocks mired in the red is that the Federal Reserve will overtighten monetary policy by not following forward-looking signs indicating that prices for energy and other items are already coming down from recent peaks. With that, today's Leading Economic Index from the Conference Board should be of interest.
Today we're also looking at one firm's view that there's still a bull case to be made for stocks, but its sitting on increasingly shaky ground.
Let's go.
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1. The upside case for stocks rests largely on two things: inflation and rates.
DataTrek Research co-founder Nicholas Colas told clients this week that investors could propel stocks up heading into 2023.
"Cautious as we are about the near-term direction of US/global equities, it always pays to consider the other side of the trade," Colas said and noted that the market usually looks six months out when pricing securities.
One factor that would be supportive of stock gains is investors having confidence that the US economy has reached a true peak in inflation, he said. Markets were shocked last week when September core inflation rose to 6.6% year over year, above expectations and months after the Federal Reserve has been jacking up interest rates to cool down prices.
A promising sign is that the five-year expected annual inflation sitting around 2.4%, implying a steep decline from the current 8% run rate.
Another factor to fuel a bull run is a decline in real rates."TIPS and Fed Funds Futures prices do currently support the idea that in six months inflation will be dropping and Fed policy will be moving into neutral," Colas said.
The Fed looks set to raise interest rates for the fifth time this year in November. But that also puts policy makers closer to a pause in rate hikes and sets up stocks for major upside, according to Fundstrat's Tom Lee.
Has inflation reached its peak or will core prices continue their ascent? Email cmozee@insider.com.
In other news:
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2. Tech-heavy Nasdaq futures are down premarket, after Tesla reported record Q3 revenue but cut its vehicle delivery target. Meanwhile, CEO Elon Musk said Tesla should be worth more than Apple and Saudi Aramco combined. More on Musk's comments — and check the latest levels here.
3. Earnings on deck: AT&T, Blackstone, and Union Pacific are all reporting.
4. Cyclical stocks are trading at a historical discount, according to Goldman Sachs. While the S&P 500 has fallen about 22% this year, US stocks are still expensive relative to history on a price-to-earnings (P/E) ratio. Check out Goldman's list of 41 historically cheap stocks.
5. Amazon boss Jeff Bezos is warning about an oncoming US recession. The billionaire backed the view of Goldman Sachs CEO David Solomon who told business owners to get ready for a contraction and more market volatility. Here's what Bezos said to his 5.3 million Twitter followers.
6. Retail investors are the most bearish they have been since this summer. Individual investors have reduced net purchases of stocks in recent days following the September inflation shock. Purchases have been trailing the year-to-date average that tends to top $1 billion, according to Vanda Research. But here's what could draw buyers back into speculative assets.
7. Billionaire investor Dan Loeb is flagging intense fear and worry in markets. The Third Point boss in his third-quarter letter to clients outlined the anxiety running through financial markets since the summer. However, he thinks there are bargains to consider.
8. A legendary options trader who banked 70 consecutive months of profits says he would trade bull call spreads. Tony Saliba is known for maintaining a long winning streak that produced profits that exceeded $100,000. Check out his tips for navigating the market.
9. Morgan Stanley strategists are warning that broader earnings expectations are still too high. But in their bearish outlook are hidden gems for this earnings season. Take a look at the bank's list of 7 stocks that have "meaningful" near-term upside.
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10. Oil prices could soar to $150 a barrel next year, according to JP Morgan. The firm's global head of energy strategy says underinvestment in the industry could lead to tight supply for the next decade. Cautiousness over tight supply helped push oil prices higher on Wednesday. Here's more on JP's Morgan's view on underinvestment.
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Curated by Carla Mozée. Feedback or tips? Email cmozee@insider.com.
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