The stock market is like a pendulum that swings between optimism and pessimism. Your job is to find the rational center that lies between the two extremes.

So far this year, investors have demonstrated manic-depressive behavior. On Thursday in seesaw trading, the major U.S. stock indices closed in the red as follows: the Dow Jones Industrial Average -313.26 (-0.89%); the S&P 500 -50.03 (-1.10%); the NASDAQ -186.23 (-1.30%); and the Russell 2000 -38.75 (-1.88%). The four indices were sharply higher for most of the session but then sold off in the final hour.

In pre-market futures trading Friday, U.S. stocks were extending their losses. However, a swing back toward bullishness is warranted by the fundamentals. I’m seeing several silver linings in the investment playbook.

Watch This Video: Where Are We in The Economic Cycle?

To be sure, rising bond yields and technology stocks don’t play well together. The tech-heavy NASDAQ has slipped into correction territory.

The Big Banks have posted a mixed earnings performance to date for the fourth quarter of 2021, but nothing has emerged from their operating results to cause serious concern. Also this week, major airlines have reported better-than-expected results, which bodes well for economic reopening.

Economic growth and corporate earnings remain strong. The revenue picture for Q4 is bright as well. More than 90% of S&P 500 companies have reported actual revenues above estimates, the highest percentage of companies reporting a positive revenue surprise since research firm FactSet began tracking this metric in 2008.

The consumer staples sector represents the highest percentage (100%) of companies reporting revenues above estimates. Consumer staples companies have been successful in passing along price increases, without consumer push-back. This dynamic fuels inflation, but also boosts top and bottom lines.

Because of the ability of major companies to hike prices, the blended net profit margin for the S&P 500 for Q4 2021 is 11.9%, which is above the five-year average of 11.0% and the year-ago net profit margin of 11.0%.

For calendar years 2021 and 2022, the estimated net profit margins are 12.6% and 12.8%, respectively (see chart).

The estimated year-over-year earnings growth rate for calendar year 2022 is 9.2%, which is above the trailing 10-year average annual earnings growth rate of 5.0% (2011-2020).

What’s more, scientists are starting to predict that Omicron will soon peak. Leaving the variant in the rear-view mirror would provide a catalyst for the market’s next leg upward. The S&P 500 as a whole is beating earnings expectations for Q1 by a wide margin and earnings projections for the rest of the year remain solid.

There’s also the historical pattern of stocks continuing to move higher, even under Fed tightening and elevated inflation.

Many analysts say the market is overvalued and I agree that many stocks have run too far on froth. You should patiently wait for some to dip down into appealing price zones. When the pandemic dust eventually settles, the return to normalcy will offer investors many great buying opportunities.

Letter to the Editor

“Hi John. Thanks so much for writing about gray rhinos, which are obvious, probable, and impactful risks. (Forget Black Swans; Fear Gray Rhinos Instead, January 19).

They give us a choice to respond — unlike the by definition unforeseeable black swan and by definition ignored elephant in the room. I’d like to clarify what a gray rhino is and is not.

I coined the term, launched it in Davos in 2013, and expanded upon it in my 2016 book and in the sequel released in 2021.

Gray rhinos can be fast or slow, near or far, independent or part of a crash (the zoological term for a group of rhinos).

As a group, gray rhinos tend to be neglected or ignored because we too often take the obvious for granted. But individual gray rhinos may or may not be recognized and dealt with. The concept is meant as a way to understand why some leaders see a gray rhino and act, while others deny or muddle.” — Michele Wucker, CEO and founder, Gray Rhino and Company.

PS: Despite all the algorithms and supercomputers on Wall Street, the surest path to wealth is the same approach that worked best decades ago: pinpoint “profit catalysts” before they happen.

That’s the time-proven approach of my colleague, Dr. Joe Duarte, chief investment strategist of our premium trading service, Profit Catalyst Alert.

In our forthcoming Profit Catalyst Symposium, Dr. Duarte will reveal his number one catalyst trade for 2022, and why it could hand you a profit of 2,022%. To claim your free VIP seat, click here now.

John Persinos is the editorial director of Investing Daily. Send your letters to: mailbag@investingdaily.com.

Subscribe to John’s video channel: