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Why Q3 Earnings Season Will Majorly Impact Where the Market Heads Next…

In last week's commentary, we discussed the importance of the mid-June lows for the S&P 500 (SPY) and the possibility of an undercut and then a rebound. In many ways, this is exactly what markets do -> frustrate the maximum amount of bulls and bears. Certainly, the bears were ebullient about this breakdown with many adding to shorts and puts, while many bulls probably capitulated. Now, we are more than 5% above these lows. Next on the docket is the September jobs report tomorrow and a CPI report next week. These will play a large role in determining the path and nature of this bear market rally. In today's commentary, I want to discuss some lessons from the past 2 bear market rallies and how we are going to apply them to our portfolio. Read on below to find out more…

(Please enjoy this updated version of my weekly commentary originally published October 6th, 2022 in the POWR Stocks Under $10 newsletter).

Over the last week, the S&P 500 (SPY) is up by 4.4%, although it was up more than 6% at some point, before some profit-taking into the September jobs report.

It’s been a broad-based rally with strength across the board. Not surprisingly, we are seeing the biggest moves in the most oversold sectors like metals, energy, and tech.

Why is the Market Rallying?

From a technical perspective, we have a double bottom, especially with the drop below support and quick recovery. As long as this double bottom is intact, we have to respect the bull case.

To be clear, this is a bounce. But given the strong technical setup and bearish sentiment, my gut tells me this is likely to turn into a bear market rally that lasts for weeks and tests important resistance levels on the upside.

And if the fundamentals evolve in a supportive manner, then the bear market rally can even turn into something more meaningful. Every bull market started as a bear market rally, but not every (or most) bear market rally turn into bull markets.

Again, I think we are at the same precipice. If this is a normal, cyclical recession, then buying at these levels is likely to be rewarded in six to twelve months' time.

If this is more in the vein of 2002 or 2008, then stocks are probably in the middle innings of their descent. In that case, the S&P 500 is likely to break 3,000 and we could see the retracement of the entire rally that began in March 2020.

Earnings and Rates

So far, all of the market weakness can be attributed to inflation and higher rates pushing down multiples for the S&P 500 (SPY).That’s because earnings growth has managed to remain positive despite the numerous headwinds faced by the economy and increasing concerns of an imminent recession.

So, the Q3 earnings season is just beginning and will play a major role in determining whether the bounce can turn into a rally, or whether it will quickly roll over. Just to set the stage, analysts are forecasting 2.9% earnings growth for Q3.

This is a drastic cut from expectations of nearly 10% earnings growth in Q3 a couple of months ago. It’s largely a result of companies' warnings and guidance lower given the numerous headwinds.

Objectively, it’s not bad. But, it’s an indication that markets are expecting some pain which creates the potential for an upside surprise. And, this is exactly what happened in Q2 and was one of the factors behind the 18% rally for the S&P 500 between mid-June and early August.

On the rate front, there are some subtle developments that are conflicting with the last CPI report which sent short-term and long-term rates, shooting up to new highs.

In essence, we are seeing real estate prices decline, used car prices decline, and freight prices drop, in addition to the relief from lower energy prices.

Just like the cyclical vs secular recession debate has major implications, the inflation debate is equally compelling and interesting. There is one camp that sees inflation as an onion.

Just because the outside is fine, doesn’t mean that the core isn’t rotten. Essentially that core inflation is its own beast with only a mild connection to more volatile, cyclical factors.

The other camp sees core inflation as simply lagging behind more real-time indicators like those mentioned above. This camp believes that inflation has already peaked and that core CPI is simply a lagging indicator.

Last 2 Bear Market Rallies

Going back and studying the last 2 bear market rallies in 2022 is quite instructive.

Both saw double-digit gains in a short period of time and massive gains in the most oversold stocks and sectors. Certain sectors and stocks even were able to make new highs.

Basically, we have to take advantage of these rallies while being mindful of the endgame, especially if the fundamentals are deteriorating.

These bear market rallies can help us identify which stocks and sectors are benefitting from secular trends vs cyclical trends. And that can really help fuel outperformance during the next bull market.

For instance, I’m noticing incredible strength and accumulation in energy, lithium, and alternative energy stocks. On the other hand, oversold stocks can be bought for trade and just trade as these are liable to roll over and make new lows.

 What To Do Next?

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares closed at $362.79 on Friday, down $-10.41 (-2.79%). Year-to-date, SPY has declined -22.73%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.


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