The renewed tough guy stance of Federal Reserve officials has soured sentiment on Wall Street. The central bank’s July minutes, released last week, were surprisingly hawkish in tone and are weighing on equity markets. Investors are in a defensive crouch, as they warily await pronouncements from the Jackson Hole (WY) summit, which runs August 24-26.

But there’s a bright spot that’s keeping a floor under stocks: second-quarter earnings for S&P 500 companies have generally surprised on the upside. What’s more, earnings performance is projected to enter positive territory for the remaining two quarters of this year and into 2024.

With 95% of S&P 500 companies already having reported Q2 2023 results, earnings are down 5% on a year-over-year basis. However, among these companies, 79% have reported actual earnings above the mean estimate. Earnings have surprised positively by 7.6%, which is above the 10-year average of 6.4%.

Eight of the 11 S&P 500 sectors are reporting year-over-year earnings growth, led by consumer discretionary and communication services. Three sectors are reporting a year-over-year decline in earnings: energy, materials, and health care.

The energy sector is reporting the largest year-over-year earnings decline among all 11 sectors at -51.4%. Lower year-over-year oil prices are contributing to the decrease in earnings for this sector.

The average price of oil in Q2 2023 ($73.56 per barrel) was 32% below the average price for oil in Q2 2022 ($108.52/bbl). The following chart tells the story of oil’s bumpy ride:

Despite production cuts by OPEC+, fears about demand destruction caused by economic deceleration have ebbed and waned, as reflected by crude price volatility.

Oil prices had been ascending this summer but recently reversed course as traders fret about slowing economies in the U.S. and China, as well as the Fed’s intimations that inflation hasn’t been conquered and rates may need to keep rising.

Read This Story: The Scarcity Trade and Why it May Be Getting Started

And yet, shrewd investors with a long-term horizon continue to make bullish bets on the energy sector. Supply constraints have not completely dissipated and OPEC+ remains determined to keep the spigot tight. Technical indicators that depict momentum are conveying a scenario of constrained supply and investors are increasing their net-long positions in energy assets.

The main U.S. stock market indices closed higher Wednesday as follows:

• DJIA: +0.54%
• S&P 500: +1.10%
• NASDAQ: +1.59%
• Russell 2000: +1.04%

Bond yields fell after downbeat economic reports in the U.S. and overseas fueled speculation that the Fed might pause to prevent a recession, although the U.S. central bank very much remains a wild card.

Clowns to the left of me, jokers to the right…

With the Jackson Hole confab looming on the horizon, Wall Street is concerned that Fed Chair Jerome Powell will become the skunk at the garden party. Powell is scheduled to make remarks this Friday; last year his hawkish statements in the Grand Tetons tanked the stock market.

Powell is the center of a debate in Washington that demonstrates how red and blue partisans increasingly occupy separate worlds.

Right-wing politicians are excoriating Powell for not being hawkish enough. In recent days they’ve been braying for his replacement, arguing that the Fed should abandon its dual mandate, stop worrying about jobs, and stick to inflation fighting. The perception of this school of thought is that the Fed has been derelict in its duty to keep prices stable and allowed inflation to run rampant.

The facts argue otherwise. The Fed has been extraordinarily hawkish and inflation has been dramatically falling to the point where the Fed now risks overdoing its tightening campaign with further rate increases.

This Powell bashing on the right is another example of how prefixed ideology is usually immune to reality. It’s also a contradictory stance for “populists” to make, because they supposedly care first and foremost about the employment security of average working stiffs.

However, the left side of the political spectrum hates Powell, too. They argue that he has been too hawkish in his efforts to please Wall Street, and risks tipping the economy into a needless recession that would disproportionately hurt the poor and middle class.

Ultra-liberals have been fierce in their denunciations of Powell, even though they seem to forget that inflation is particularly stressful for low-income households.

It’s almost enough to make you feel sorry for the guy! If politicians on both the right and left are howling for his blood, maybe he’s following the correct course after all. Stay tuned for his stint in the bully pulpit Friday.

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John Persinos is the editorial director of Investing Daily.

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