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.

Just a few months ago, two scenarios seemed improbable: “Goldilocks” economic conditions and a “soft landing.” Those who posited such hopes were mostly derided by the Wall Street consensus as deluded Pollyannas. No longer. Bearish sentiment is increasingly hard to find.

We’re witnessing resilient economic growth combined with cooling inflation. The jobs market remains healthy but it’s slowing. Corporate profits are under pressure but Q2 results so far have been surprising on the upside. Last week, the major U.S. and overseas equity indices closed out another winning week.

For the week ending July 28, the Dow Jones Industrial Average rose 0.7%; the S&P 500 rose 1.0%; the tech-heavy NASDAQ rose 2.0%; and the EAFA rose 0.7%. The benchmark 10-year Treasury yield stayed below 4.00%, only inching up 0.1%; and crude oil prices jumped 4.4%. The Dow posted a winning streak of 13 consecutive sessions, which ended when it fell last Thursday.

The S&P 500 has risen 19.3% year to date, as of market close July 28, putting the index less than 5% from its all-time high reached in January 2022.

What’s particularly encouraging is the rally’s increasing breadth. The New York Stock Exchange Advance/Decline line (NYAD) has risen well above its major moving averages, which signals a broadening of the rally. It’s not just the mega-cap technology stars that are driving this rally. The upswing is spreading to smaller businesses that are cyclical in nature (see my video for charts).

Second-quarter earnings results have been surprising on the upside. For Q2 2023, with 51% of S&P 500 companies reporting actual results, 80% have reported a positive earnings surprise and 64% have reported a positive revenue surprise.

Favorable inflation reports have been boosting stocks. The U.S. Bureau of Economic Analysis (BEA) reported last Friday that the personal consumption expenditures (PCE) index decelerated in June, despite resilience in consumer spending and jobs growth. The PCE is the Federal Reserve’s preferred inflation gauge.

The PCE index rose 3% in the 12 months through June, in line with consensus expectations. That level was a slowdown from 3.8% in the previous month.

After excluding the volatile components of food and fuel, the “core” PCE rose by 4.1%, slightly less than expected. That’s considerably lower than the peak of 5.4% in 2022, and it represented the lowest reading since September 2021.

The BEA also reported last Thursday that U.S. gross domestic product (GDP), adjusted for inflation, climbed at a 2.4% annual rate in the second quarter of 2023. That was up from a 2% growth rate in the first three months of the year and much faster than economists had expected.

The Fed’s policymaking Federal Open Market Committee (FOMC) last week lifted interest rates to a range of 5.25% to 5.50%, the highest level since 2001.

But the betting on Wall Street is that the Fed will reverse course and cut rates in March 2024, a move that probably would trigger a huge relief rally.

To be sure, we’ll get a pause before a cut, but there’s good news, if you’re a patient investor. Since 1989, stocks have strongly rallied soon after the hiking cycle has ceased.

The week ahead…

The following economic reports are scheduled for release in the coming days:

S&P final manufacturing PMI, job openings, ISM manufacturing, construction spending (Tuesday); ADP employment (Wednesday); initial jobless claims, U.S. productivity, S&P final U.S. services PMI, ISM services, factory orders (Thursday); U.S. nonfarm payrolls, U.S. unemployment rate, and U.S. hourly wages (Friday).

If you had listened to the bears so far this year, you would have left a lot of money on the table. That said, the markets remain uncertain and a major surprise could still derail the rally.

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John Persinos is the editorial director of Investing Daily.

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