As an investor, you always need to think globally. Make sure your portfolio is diversified across international regions.

Of course, not everyone embraces globalization. Many individuals displace blame for their economic woes onto globalization, focusing their disaffection on immigrants and workers abroad. Global investors, on the other hand, are throwing a party right now.

In recent weeks, a broad range of asset classes have soared, including the S&P 500, small stocks, global developed markets, global bonds, and emerging markets. Asian stocks have racked up their best week since November 2022. European equities have been on a tear as well.

Fostering this global bullish sentiment is increasing confidence that the central bank of the world’s largest economy has finally won the fight against inflation.

Soft data released this week in the U.S. for both the consumer price index (CPI) and producer price index (PPI) are enhancing odds of an economic soft landing.

Read This Story: The Inflation Fever Finally Breaks

One problem with globalization is that bad ideas can travel as fast as good ones. In our 24-7 fiber optically connected world, the herd mentality of investors can spread far and wide. So how much can we trust the global rally? Let’s look for clues.

Earnings season gets underway…

Wall Street is turning its attention to the onset of second-quarter earnings season, with hopes that operating results will keep the rally alive.

Those hopes might get dashed. For Q2 2023, the estimated year-over-year earnings decline for the S&P 500 is -7.2%, according to the research firm FactSet. If -7.2% turns out to be the actual decline for the quarter, it will mark the largest earnings decline reported by the index since Q2 2020 (-31.6%).

That said, forward guidance has been encouraging in certain sectors. The information technology and industrials sectors have the highest number of companies issuing positive earnings guidance for the second quarter at 20 and 9, respectively (see chart).

Since the beginning of July, the estimated earnings decline for the S&P 500 for Q2 2023 increased to -7.2% from -6.9%. This earnings headwind could keep the stock market range bound until the Federal Reserve provides clarity on monetary policy at its next meeting July 25-26.

The major financial story Friday is the kick-off of Q2 earnings season, with operating results from the big banks. JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) reported before the opening bell.

The results were positive, with all three banking behemoths beating expectations on the top and bottom lines. The major U.S.-based banks are considered bellwethers for not just the U.S. but also the global economy, so these results bode well for equity markets.

JPMorgan reported earnings per share (EPS) of $4.37 versus expectations of $4.00. Revenue reached $42.4 billion vs. the $38.9 billion estimate.

Citigroup posted EPS of $1.33 vs. expectations of $1.30. Revenue came in at $19.4 billion vs. $19.2 billion expected.

Wells Fargo reported EPS of $1.25 vs. $1.16 expected, and $20.5 billion in revenue vs. $20.1 billion expected.

The banks benefited in Q2 from rising interest rates. When rates are higher, banks make more money by taking advantage of the wider spread between the interest they pay to their customers and the profits they generate by investing. JPM, C and WFC boosted their net interest income outlooks.

The main U.S. stock market indices took a healthy breather Friday and closed mostly lower:

• DJIA: +0.33%
• S&P 500: -0.10%
• NASDAQ: -0.18%
• Russell 2000: -1.01%

The Dow Jones Industrial Average ended in the green due to strong post-earnings spikes from components such as UnitedHealth Group (NYSE: UNH), which soared 7.25%. Global stocks closed mixed.

According to its latest report released July 14, the International Monetary Fund projects that global growth will decelerate from 3.2% percent in 2022 to 2.7% in 2023. That isn’t blockbuster growth, but neither is it a recession. Considering recent shocks to the system, notably the Russia-Ukraine war, that’s a solid level of expansion.

Commodity prices (notably for copper and crude oil) have been in a slump due to recession fears, but improving macroeconomic conditions should reverse that trend and consequently boost emerging markets. Indeed, crude oil and copper prices closed higher for the week.

A cloud on the global horizon is China’s slowing economy. The world’s second-largest economy has stumbled in recent months, with industrial output and retail sales growth missing forecasts.

China’s massive debt and shaky real estate sector add to worries about the globe’s growth engine. Beijing will need to address these issues to sustain its post-pandemic recovery.

But for now, better-than-expected bank earnings, cooling inflation, and the frenzy over artificial intelligence (AI) are keeping the broad-based rally alive.

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John Persinos is the editorial director of Investing Daily.

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