Hurrah! The NASDAQ 100 is now in a bull market. The S&P 500 isn’t far behind. But the emergence of a new bull market is typically met with enormous skepticism by investors who’ve gotten their brains beaten out by the bear.

Wariness certainly is warranted right now. Liquidity is the lifeblood of the equity markets, and until the Federal Reserve stops hiking interest rates, the upward movement of stocks probably won’t show sustainable momentum.

The S&P 500 remains range bound between 3800 and 4100, teetering on the cusp of either a breakout or a breakdown. Much hinges on Fed policy.

Another concern is decelerating corporate earnings growth. Corporate earnings are expected to rack up a significant decline for the first quarter of 2023, which in turn could tip the scales toward a broader breakdown.

Adding to the uncertainty is Fed Chair Jerome Powell’s incessant jawboning, which won’t end anytime soon. Investors will be in suspense until the next Federal Open Market Committee (FOMC) monetary policy meeting, scheduled for May 2-3. That’s when we’ll discover whether another rate hike is forthcoming and if it will be the final or penultimate increase.

Investors can’t blindly buy hoping a rising market will buoy bad picks. It’s noteworthy that analysts are increasingly pessimistic in their projections for first-quarter 2023 earnings growth for the S&P 500, versus historical averages.

As of this writing, estimated earnings for Q1 are lower compared to expectations at the start of the quarter.

The estimated year-over-year earnings decline for the S&P 500 for Q1 2023 currently stands at -6.1%, which is far worse than the estimate of -0.3% at the start of the quarter (December 31).

If -6.1% turns out to be the actual YoY decline for the quarter, it will represent the largest earnings decline reported by the index since Q2 2020 (-31.8%).

At the sector level, analysts are most optimistic about energy (63%) and communications services (60%); these two sectors have the highest percentages of analyst Buy ratings.

Analysts are most pessimistic about the consumer staples (44%) sector. The following chart tells the full story:

The revenue picture isn’t encouraging either. Analysts also have lowered their estimates for Q1. As of today, the S&P 500 is expected to report YoY revenue growth of 1.9% for the quarter, compared to the estimated revenue growth rate of 3.4% on December 31.

While stocks ultimately trade on valuation, most surprise moves are based on performance versus expectations. With earnings expectations on the low side, the chance of upside is magnified.

Odds of a stock market breakout were enhanced by two new economic reports that are deflationary.

The U.S. Labor Department reported Thursday that initial jobless claims for the week ended March 25 totaled 198,000, up 7,000 from the previous period and slightly higher than the 195,000 consensus estimate. Continuing claims, which run a week behind, climbed 4,000 to 1.689 million.

In a separate report Thursday, the U.S. Bureau of Economic Analysis released its third and final fourth-quarter gross domestic product (GDP) estimate, which continued the trend of declines. GDP printed 2.9% in the first estimate in January (above the 2.6% estimate), then fell to 2.7% in the second estimate in February, and it is now down again to 2.6%.

In the wake of these two economic reports, the main U.S. stock market indices closed higher Thursday (except for the small-cap Russell 2000), as follows:

• DJIA: +0.43%
• S&P 500:+0.57%
• NASDAQ: +0.73%
• Russell 2000: -0.18%

Big Tech led the way. The CBOE Volatility Index (VIX), aka “fear guage,” pulled back below the significant threshold of 20, to hover at 19. When the VIX surpasses 20, you can expect greater than normal volatility over the next 30 days, and vice versa.

We could be witnessing the birth pangs of a new bull.

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John Persinos is the editorial director of Investing Daily.

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