You’ve probably heard financial pundits opine lately about The Kamala Trade or The Trump Trade. I consider such notions to be The Chump Trade.

Politics and financial punditry are like the peanut gallery of the investment world — loud, opinionated, and often entirely unhelpful.

They fuel the illusion that you can time the market if only you listen closely enough to the nattering performers on cable news. In truth, the stock market’s long-term direction is far more about underlying fundamentals and consumer behavior than the daily drama unfolding on your TV screen.

Among all the fundamental indicators that I follow, the most influential for my analysis is corporate earnings growth. More about corporate earnings, in a moment.

Backseat drivers…

Imagine trying to read a map while a couple of backseat drivers argue over which way to go based on yesterday’s weather forecast. That’s what it’s like when investors get too wrapped up in the daily noise from politicians and market analysts.

These talking heads thrive on drama and immediacy, convincing you that every social media post, soundbite, or policy shift is a turning point that will make or break your portfolio. In reality, they’re just selling the sizzle, not the steak.

Politicians come and go, policies change, and markets have a remarkable ability to adapt. Financial pundits, for their part, make a living off being confidently wrong in public, providing just enough insight to sound credible while hedging their predictions to avoid accountability.

On the other hand, focusing on corporate earnings growth aligns with understanding a company’s ability to generate value over time. While market noise can cause short-term fluctuations, it lacks the substance to influence long-term stock price trends.

Earnings growth provides a solid foundation for stock price appreciation by demonstrating a company’s strength, potential for future growth, and ability to return value to shareholders. Investors who prioritize earnings over noise are more likely to achieve sustainable, long-term investment success.

The good news is, second-quarter 2024 earnings have been robust across the board. With approximately 96% of S&P 500 companies having reported, 79% have surpassed earnings estimates.

The index is on track to see earnings per share (EPS) growth of 10.8% year-over-year for the second quarter, which would be the highest since the last quarter of 2021 (see chart).

Considering elevated valuations compared to historical averages, strong corporate profit growth will be crucial for sustaining the current momentum in equity markets.

Factors such as the ongoing economic expansion, improved labor productivity, and imminent Federal Reserve interest rate cuts are likely to bolster corporate earnings and by extension market performance.

In focus this week are two technology bellwethers: Nvidia (NSDQ: NVDA) and Salesforce (NYSE: CRM, which are set to release their quarterly earnings after Wednesday’s market close.

Given that technology companies make up nearly a third of the S&P 500, the outcomes of these reports are likely to influence market sentiment for the remainder of the week.

In addition to corporate earnings, Wall Street is eyeing fresh inflation data, with the July personal consumption expenditures (PCE) report scheduled for release Friday.

Market expectations are for the headline PCE index to rise by 0.2% month-over-month and 2.6% year-over-year. The core PCE, which excludes food and energy, is projected to show a monthly increase of 0.15% and a yearly rise of 2.7%.

After a series of higher-than-expected inflation readings earlier this year, recent months have seen a cooling trend, with the three-month annualized rate of change in core PCE falling to 2.3% following the June data.

The combination of lower inflation and weakening labor market conditions has shifted market expectations toward Fed rate cuts, with futures markets pricing in the first reduction at the Fed’s September meeting and anticipating a cumulative cut of around 100 basis points by the end of the year.

I continue to believe that a favorable mix of Fed rate cuts, steady economic growth, and solid earnings performance will provide support for equity markets in the months ahead. In the meantime, tune out the peanut gallery.

The main U.S. stock market indices took a breather Wednesday and closed lower as follows:

• DJIA: -0.39%
• S&P 500: -0.60%
• NASDAQ: -1.12%
• Russell 2000: -0.65%

WATCH THIS VIDEO: Powell Cements Rate Cut…What it Means for YOUR Portfolio

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John Persinos is the editorial director of Investing Daily.

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