Welcome to my latest video presentation for Mind Over Markets. The article below is a condensed transcript; my video contains additional details and several charts.

Partisan news outlets have created an alternate universe. If you listened to them, you’d think the American economy and financial markets were in the toilet. But that’s simply not true.

Case in point: As equities extend their rally, with technology stocks in the lead, I recently heard one “pundit” warn that Wall Street is “partying like it’s 1999.” That assertion is absurd. During the dot.com boom-and-bust of the late 1990s, many of the Internet companies driving the rally were overly hyped small-cap start-ups with no earnings.

This time around, the rally in the NASDAQ and S&P 500 is being driven by investments in artificial intelligence (AI) made by mega-cap stalwarts with fortress balance sheets. Don’t get distracted by glib narratives that aren’t based on facts. It’s a sure way to lose money.

Last week, the rally showed that it has legs. From July 10-14, the Dow Jones Industrial Average gained 2.3%; the S&P 500 gained 2.4%; the tech-heavy NASDAQ gained 3.3%; and the MSCI EAFE gained 4.7%. Global stocks, as reflected by the EAFE, have been on a tear in recent weeks as overseas investors see signs that the world’s largest economy is winning the war against inflation.

The benchmark 10-year Treasury yield fell 0.2% and oil prices rose 2.0%, two trends that reflect increasing economic optimism.

On Monday, the main U.S. stock market indices extended last week’s gains and closed higher.

The latest data for the consumer price index (CPI) and producer price index (PPI), both for June and released last week, showed markedly cooling inflation.

The CPI last month increased by 3.0% compared to the same month a year ago. That’s the smallest increase since March 2021, when inflation was starting to pick up. The CPI is now just one-third of where it peaked a year ago.

The Federal Reserve next meets on July 25-26, at which time it’s likely to hike rates by another 25 basis points, but we’re nearing the end of the tightening cycle.

Technology stocks have been in the vanguard of the equity market’s rally, but we’re continuing to see the rally broaden, with the New York Stock Exchange Advance/Decline line (NYAD) trading above its 50- and 200-day moving averages.

A rising NYAD is bullish because it signals improving market breadth and belies fears that the rally is disproportionately reliant on a handful of Big Tech players (see my video for charts).

That’s the good news. However, the picture for corporate earnings growth is downbeat. For Q2 2023, the estimated year-over-year earnings decline for the S&P 500 is -7.1%, according to the research firm FactSet, using the latest data as of July 14.

If -7.1% turns out to be the actual decline for the quarter, it will mark the largest earnings decline reported by the index since Q2 2020, at -31.6%.

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

The results were generally positive, with all three banking behemoths beating expectations on the top and bottom lines. The largest U.S. banks are economic bellwethers, so their Q2 results are sanguine harbingers for the overall economy.

Ah, but not so fast. Every silver lining comes with a dark cloud. It’s worth noting the banking industry is reporting higher provisions for loan losses in Q2 2023 compared to Q2 2022.

Provisions for loan losses don’t affect top-line growth, but they do adversely affect bottom-line growth, because these provisions are tabulated as an expense on a company’s income statement.

The “blended” provision for loan losses for the 15 banks in the banking sector is $9.9 billion for Q2 2023, compared to $4.9 billion in Q2 2022. “Blended” combines actual results for companies that have reported and estimated results for companies yet to report.

If $9.9 billion is the actual number for the quarter, it will mark a year-over-year increase of 100%, the third highest number for banking over the past five years.

All that said, the economy is showing resilience and should pick up steam when the Fed finally pauses.

The week ahead…

The salient economic reports scheduled for release in the coming days are retail sales, industrial production, and homebuilder confidence index (Tuesday); housing starts (Wednesday); initial jobless claims, existing home sales, and U.S. leading economic indicators (Thursday).

Moving forward, how should you trade? Despite the market’s strong gains, I see opportunities to diversify into the lagging segments of the equity market that sport lower valuations. You should also consider dollar-cost-averaging, to take advantage of the higher volatility we’re likely to see until Fed policy becomes clearer.

Now’s the time to gain exposure to growth stocks. Much of the fuel for this rally has derived from enthusiasm over AI. If you’re looking for a way to cash in on the AI super-boom, I suggest you consider the advice of my colleague Jim Pearce.

As chief investment strategist of our flagship publication Personal Finance, Jim Pearce has just found the optimal AI play. The company’s leading-edge technology has the power to withstand economic ups and downs, or the vacillations of Fed policy.

Jim’s AI investment lets you get started for about $100…and it generates regular cash payouts of up to $5,397. Want to learn more? Click here.

John Persinos is the editorial director of Investing Daily.

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