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Stocks have made impressive gains over the last few months and are currently at or near all-time record levels. Many in the market are hoping that the worst is behind us and that the rebound from the April 8th bottom is for real. Tariffs drove the market sell-off, with the actual announced levies turning out to be a lot bigger than many in the market had expected. But the subsequent start of bilateral trade negotiations and announcements of interim trade deals have substantially eased those worries. Several in the market have now come around to the view that while plenty of tariffs-related issues remain unresolved, we now largely know what we are dealing with. A constructive view of the economy is that while tariffs-induced uncertainty will likely have a bearing on near-term growth trends, the U.S. economy's fundamentals remain rock solid. This view is also optimistic about the Trump administration's non-trade policy agenda, including taxes and regulatory reform. Market bears see this market optimism as without a fundamental basis. This line of thinking sees the tariffs-induced uncertainty to be severe enough to push the economy into a recession. Market bears don't expect the Fed to come to the economy's aid, as a result of tariff's inflationary effects. Worries about macroeconomic fiscal imbalances and stock market valuation also show up in the bearish view of the market. The interplay of these competing views will determine how the market performs in the coming months and quarters. To that end, let's examine the landscape of bullish and bearish arguments to help you make up your own mind. Let's talk about the Bull case first. The Economy's Strong Foundation: The U.S. economy has literally been the envy of the world over the last few years and those fundamentals are still intact despite continuing worries about their durability. It is this inherent resilience that allowed the U.S. economy to continue growing in the face of extraordinary Fed tightening over the last couple of years and is expected to be at play in the current tariff-centric policy environment Growth is expected to decelerate to account for uncertainty around the tariffs issue. We see this in consensus GDP growth expectations for this year, which are notably below the +2.8% growth pace in 2024 and +2.9% in 2023. These expectations show that the economy entered the current period of policy uncertainty in excellent shape. The latest GDP growth read of +3% for 2025 Q2, which follows the first quarter's modestly negative growth print, gives us a true sense of the economy's resilience. We now know for a fact that GDP growth would have been positive in Q1 as well had it not been for surging imports in the period that were trying to front-run the coming tariffs. A stable consumer and business spending backdrop on the back of a very strong labor market ensures that growth remains positive, albeit at a lowered trajectory. This is beneficial to the central bank's inflation fight, with moderating economic growth pushing inflation readings towards the Fed's 2% target. The Fed's latest policy decision was no surprise to anyone in the market and they remain on track to cut rates twice rates later this year. All in all, the strong pillars of the U.S. economic foundation run contrary to what are typically signs of trouble ahead on the horizon. The Fed's Easing Cycle: The Trump administration's trade agenda has added an element of uncertainty to the market's inflation and Fed expectations. The bulls see the inflation issue as headed towards a resolution to the central bank's satisfaction, allowing the Fed to continue with easing policy. This view doesn't see tariffs as inherently inflationary, but acknowledges that the issue will likely prompt the Fed to adopt a wait-and-see approach and implement fewer rate cuts this year than would otherwise be the case. The Fed's decision to keep interest rates unchanged at its July meeting was in-line with market expectations, with a majority of market participants expecting the September meeting to bring in the rate cut announcement. The central bank officials have articulated that they would like to see the economic effects of the emerging tariff regime before resuming the easing cycle. Market bulls would prefer to have more rather than fewer rate cuts, but they can appreciate the central bank's logic. The wait-and-see approach has the added benefit of giving the Fed time to size up the effects of the Trump administration's policies, particularly on the tariffs front. With the overall policy bias firmly in the easing mode, the expectation is that the next rate cut will arrive after the Summer, most likely in the September 16-17 meeting. Continued . . . | ||||
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| Valuation & Earnings: Tied to the economic and interest rate outlook is the question of stock market valuation that still looks reasonable given the expected interest rate trajectory. The appropriateness or otherwise of valuation multiples has to be seen in the context of interest rate outlook. Valuation multiples typically expand when the Fed is easing policy, particularly when the catalyst for the loosened policy is confidence on the inflation front instead of growth fears. Earnings outlook is a key part of the valuation discussion. Contrary to the earlier doom-and-gloom fears, the ongoing 2025 Q2 earnings season is showing a steadily improving earnings outlook for the coming periods. You can clearly see this in earnings expectations for 2025 Q3 and beyond. What we are seeing this earnings season is that while companies in a number of industries are unable to have adequate visibility in their business, there are many others that continue to drive sales and earnings growth even in this environment. We are seeing many of these leaders from a variety of sectors, including Technology, come out with strong quarterly results and describe trends in their businesses in reassuring terms despite the tariffs uncertainty. Current consensus expectations for this year and next reflect strong growth that is broad-based and not driven by one or two sectors. While estimates had come down sharply earlier this year, the trend has totally shifted now, with estimates for the second half of the year and beyond starting to go up. In the absence of a nasty economic downturn, the earnings picture can actually serve as a tailwind for the stock market in an environment of easing Fed policy. Let's see what the Bears have to say in response. The Market's Fed Exuberance: The Fed did the expected at its latest policy meeting by leaving interest rates unchanged, despite unconventional public pronouncements from the Trump administration to do otherwise. The expectation is for two rate cuts this year, with many in the market hoping for the September meeting to bring the next rate cut provided incoming economic data over the coming weeks remain supportive. The September timeline is likely nothing more than wishful thinking, as it will be next to impossible for the Fed to start cutting rates at that meeting since no tangible progress on the inflation front will have taken place by then. This is hardly a far off scenario given the Trump administration's policy agenda on the tariffs and immigration fronts. There is genuine uncertainty as to the final impact of tariffs on inflation and economic growth. Many in the market see the ongoing elevated yields on longer-dated treasury bonds as reflective of such worries. Tied to the first risk is the prospect that the economy's true health may be far more fragile than the strong Q2 GDP reading suggests. Low income households have been struggling for a while, but anecdotal evidence from earnings calls suggest that even better off consumers are getting more cautious in their spending plans. On top of this is the diminished business spending outlook as a result of policy uncertainty, at least over the near term, as we saw in the Q2 GDP report. In the worst case scenario, stalled progress on the inflation front may stop the Fed from easing policy even as the economy continues to weaken further; this is the so-called 'stagflation' scenario. But even if that isn't the case and the Fed starts easing in September or any of its subsequent meetings, the decelerating momentum in the economy may be hard to stop by then. The Valuation Reality Check: Given the bears' view that the prudent course for the Fed is to be in no hurry to start easing policy in the absence of any issues in the economy, they see no fundamental reason for valuation multiples to expand. Higher-for-longer interest rates should have a direct impact on the prices of all asset classes, stocks included. Everything else constant, investors will be using a higher discount rate, a function of interest rates, to value the future cash flows from the companies they want to invest in. This means lower values for stocks in a higher interest rate environment. The Earnings Growth Question: Current consensus earnings estimates show +7.7% growth this year and +13% growth in 2026, which follows the +10.7% earnings growth in 2024. Market bears see these earnings growth expectations as inconsistent with an economy that is faced with a significant jump in tariffs. The full extent of the emerging tariff regime has yet to take shape, but the aggregate effective tariff rate is already close to 20%, an almost ten-fold increase relative to what was in place for the last many decades. It is hard to envision that this tariff jump will have no impact on inflation, economic growth or corporate earnings. Notwithstanding the tough going in the manufacturing sector and the growth implications of the still elevated treasury yields despite Fed easing, earnings expectations for this year and next will need to come down significantly to get them in-line with the economic ground reality. Where Do I Stand? While I acknowledge that the next rate cut could get pushed beyond September, I am skeptical of the higher-for-longer Fed policy view and see this scenario as nothing more than a low-probability event. The current Fed Funds rate level is almost twice what central bank officials and economists see as the 'neutral' policy rate. At the 'neutral' policy rate level, Fed policy is neither 'stimulating' nor 'restricting' economic activities. Even if further progress on the inflation front is a lot slower than what the Fed and the market is projecting at present, the central bank has plenty of cushion in its policy arsenal to start easing policy without adversely affecting its inflation fight. This doesn't mean that the next rate cut is around the corner, but it does suggest that they don't need to wait for an extended period to consolidate the inflation gains. Regular readers of my earnings commentary know that the earnings picture continues to be resilient, with the latest development on the earnings front is upward revisions to estimates for the current and coming periods. The overall policy thrust of the Trump administration is expected to be pro-growth and pro-market, but it is nevertheless reasonable to expect some period of market tentativeness as we sort through the bilateral trade negotiations. We remain confident that investors will soon come around to our view of inflation, earnings and the much more positive times ahead after a short period of volatility. The market's rebound from the April lows reflects this view of the economy and market. How to Take Advantage As this positivity unfolds, we can take advantage by building positions in great stocks with solid fundamentals and clear growth prospects. That's why I'm inviting you to download our just-released Special Report, 5 Stocks Set to Double. Each stock was handpicked by a Zacks expert as their personal favorite to have the best chance of gaining +100% and more in the months ahead. While we can't guarantee future success, previous editions of this report have racked up some huge gains. Examples include Rolls-Royce. +112%, Vertiv +171% and Hims & Hers Health +209%.¹ The earlier you get into these new stocks the higher their profit potential: Stock #1: AI Infrastructure Firm with a Forecasted +1,200% Revenue Increase Stock #2: Little-Known Fintech Capitalizing on Crypto's Resurgence Stock #3: Next-Generation Safety, Powered by Artificial Intelligence Stock #4: A Hot Stock Growing Fast in One of Today's Hottest Industries Stock #5: Medical Company With Breakthrough Treatments in the Pipeline To put the odds of success even more in your favor, you'll also gain 30-day access to our unique arrangement called Zacks Investor Collection. It gives you real-time picks and commentary from all our long-term portfolios designed to identify trades with the highest probability of success. Last year alone, they closed 30 double and triple-digit wins. While not all picks can be winners, recent gains reached as high as +169.9%, +198.4%, and +263.2%.¹ Plus, it includes Zacks Premium research so you can find winning stocks, ETFs and mutual funds on your own. Keep in mind, the opportunity to download our 5 Stocks Set to Double Special Report ends at midnight on Sunday, August 3. Look into 5 Stocks Set to Double and Zacks Investor Collection now » Thanks and good trading
Sheraz Mian Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access Zacks Investor Collection. | ||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or U.S. investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through July 5, 2025. The performance is the equal weighted performance of a hypothetical portfolio consisting of stocks with a Zacks Rank of #1 that was rebalanced monthly from January 1988 through December 2013 and weekly from 12/31/13 through Monday's open on July 5, 2025. For each stock with a Zacks Rank #1 at the beginning of the month, the total return during the month was calculated as the % change in the price of the stock from the closing price of the prior month to the closing price of the current month plus any dividends received during the month. The monthly individual stock returns were then averaged to determine the portfolio return for the month. For each stock with a Zacks Rank #1 at the beginning of the week, the total return during the week was calculated as the % change in the price of the stock from the opening price for the week to the opening price of the next week plus any dividends received during the week. The weekly individual stock returns were then averaged to determine the portfolio return for the week. If no month-end price or week end open price was available for a stock, it was not included in the portfolio return for the month or the week. The monthly and weekly returns were compounded to arrive at the annual returns. The annualized return is the annual return that, had it been achieved in each year or portion of a year, would have compounded to create the total return over the full time period. These returns are based on the list of Zacks Rank #1 Stocks that was available to clients of Zacks as of the beginning of the month, when returns were calculated monthly, or as of the beginning of the week when returns were calculated weekly. These returns are higher than the returns an investor could achieve investing real money in a portfolio of Zacks Rank #1 stocks because the returns of the hypothetical Zacks Rank #1 portfolio exclude a number of costs, including commissions incurred for trading, the average bid ask spread, the price impact of the trading and, prior to 2013, in those months when the end of the month fell on Friday, Saturday or Sunday, the overnight return from the month end close to the open on the next trading day. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
Sabtu, 02 Agustus 2025
How to Make the Most of Today's Market
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