Suppose they gave a war and no one came? That was a widely cited slogan of the peace movement during the Vietnam War. I’ve come up with my own slogan, appropriate for investors: Suppose they gave a recession and no one came?

Throughout the first half of 2023, most forecasters were predicting an imminent recession. Not anymore.

Consider second quarter 2023 earnings season, which has nearly drawn to a close. Did concerns about the economy translate into more references to the word “recession,” during Q2 earnings conference calls? The surprising answer is no.

Research firm FactSet studied the conference call transcripts of all the S&P 500 companies that conducted Q2 earnings calls from June 15 through August 31. According to the survey, only 62 companies cited the term “recession.”

After peaking in Q2 2022, the number of companies citing recession declined for four consecutive quarters (see chart).

For Q2 2023, the blended year-over-year earnings decline for the S&P 500 is -4.1%. “Blended” combines actual results with estimates. But keep in mind, the earnings picture has markedly improved. On June 30, the estimated Q2 earnings decline was pegged at the much worse level of -7.0%.

Corporate earnings have been coming in much better than feared. For Q2, with nearly 100% of S&P 500 companies reporting actual results, 79% of companies have reported a positive earnings surprise and 64% have reported a positive revenue surprise. Several bellwether technology giants crushed estimates.

What’s more, analysts estimate that Q3 and Q4 will see a return to positive earnings growth for the S&P 500 as a whole. The earnings performance for all of calendar year 2023 is expected to come into the black.

WATCH THIS VIDEO: Your Post-Labor Day Market Analysis

During the last three months, energy, materials, consumer discretionary, and industrial stocks have led the market, with all of these sectors posting double-digit gains. Defensive areas, e.g. utilities, consumer staples, and health care, have been laggards.

The resurgence of cyclicals reflects recent reports that show resilient earnings and economic growth throughout the summer. In pre-market futures trading Thursday, the main U.S. stock market indices were mixed, as investors await new economic data.

The Atlanta Fed currently estimates that U.S. gross domestic product (GDP) will grow 5.6% on an annualized basis in the third quarter. Several private forecasters are offering similarly strong numbers.

Accelerating consumer spending is providing a major impetus for the sanguine economic forecasts. According to the U.S. Bureau of Economic Analysis (BEA), consumer spending rose 0.6% in June and 0.8% in July 2023 (on a month-over-month basis). The summer spending surge will resonate in future GDP numbers.

Despite rising interest rates, the consumer is hanging tough, although there’s been a dichotomy in the performance of retailers, with bargain-oriented stores outpacing their more expensive peers.

Therein lies the Catch-22: the economy has been so strong, investors are worried that the Fed will hike rates later this month as insurance against inflation. In another inflationary sign, the Labor Department reported Thursday that the number of Americans applying for jobless claims last week fell to the lowest level in seven months.

U.S. applications for unemployment benefits fell by 13,000 to 216,000 for the week ending September 2, the lowest level since February. The four-week moving average of claims, which smooths out weekly volatility, fell by 8,500 to 229,250.

Also on Thursday, the U.S. Energy Information Administration (EIA) reported another decline in U.S. inventories of crude oil. The EIA reported an inventory draw of 6.3 million barrels for the week ending September 1, following a huge decline of 10.6 million barrels for the previous week. A continued tightening of supply will push crude oil prices ever higher, which is good news for energy investors but the trend increases inflationary pressures.

The main U.S. stock market indices closed mostly lower Thursday as follows:

• DJIA: +0.17%
• S&P 500: -0.32%
• NASDAQ: -0.89%
• Russell 2000: -0.99%

Shares of Apple (NSDQ: AAPL) fell 2.92%, its second day of declines, following reports that the Chinese government would ban government workers from using iPhones. China is Apple’s second-biggest single market by sales outside the U.S. The Cupertino giant’s slump helped drag down the tech-heavy NASDAQ.

Keep an eye on the bond market. The U.S. Ten Year Note yield (TNX) is threatening to break out onto the upside. The benchmark TNX hovers at about 4.3%; a rise above 4.5% would be bearish for stocks.

Economic optimism could quickly sour and yields jump, if the Federal Reserve hikes interest rates at its September 19-20 policy meeting.

Higher rates tend to exert a lagging effect; we still haven’t completely grasped the tortuous economic effects of aggressive tightening. Another boost in rates would turn the thumb screws on investors. We’ll soon see if Fed Chief Jerome Powell plays the role of benefactor…or Torquemada.

Regardless, you can still make money, in up or down markets, by heeding the advice of my colleague Jim Pearce.

Jim Pearce is the chief investment strategist of Mayhem Trader. Jim doesn’t worry about market mayhem…he methodically makes money from it.

Jim has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn more? Click here now.

John Persinos is the editorial director of Investing Daily.

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