As editor of the twice-weekly publication Marijuana Investing Daily, I write about the burgeoning marijuana and psychedelics industries. Today, for this Mind Over Markets column, I want to write about another drug. It’s called “hopium.”

Hopium isn’t a real drug, of course. It’s a popular term for unrealistic hopes that are pursued like a drug. This habit-forming behavior is dangerous to the health of your investment portfolio.

Investors have been hitting the hopium pipe when it comes to monetary policy. The Federal Reserve’s aggressive tightening phase is probably over, but it’s a stretch to now expect the transition to outright accommodation.

And yet, a major factor behind the stock market’s rally this summer has been the hope that the Fed will execute a dovish pivot in September, due to recent signs that inflation is easing.

To be sure, we’ve gotten good news lately on consumer and producer prices, but inflation still far exceeds the Fed’s 2% target. Shipping and materials costs need to fall much further before they return to pre-pandemic levels. Commodities prices have been falling, but in recent days, the price of crude oil has resumed its upward trajectory.

Hopes for a Fed pivot could turn out to be delusional and, when reality sets in, stocks could take a tumble. As Nancy Reagan might have said: Just say “no” to hopium.

The rally: not dead yet…

The major U.S. equity indices closed higher Thursday after Wednesday’s modest selloff. In pre-market futures trading Friday, stocks were edging lower again.

The benchmark 10-year Treasury yield has ticked below the 3.0% threshold and as of this writing hovers at 2.9%, amid encouraging economic data.

The Philadelphia Fed Index, released Thursday, showed that regional manufacturing activity unexpectedly rebounded in August and broke into positive territory, a signal that manufacturers are expanding production capacity.

The Philly Fed data is compiled from a survey of about 250 manufacturers in the Philadelphia Federal Reserve district. The index also showed that prices for raw goods and materials declined in August, supporting the contention that inflation has peaked.

In further good economic news, initial jobless claims released Thursday showed a drop to 250,000 for the week ended August 13, versus consensus estimates of 260,000.

Corporate earnings also support the bull case. For the second quarter, the blended year-over-year earnings growth rate for the S&P 500 is 6.7%, according to FactSet.

Six sectors are reporting year-over-year growth in earnings for the quarter. The energy sector is reporting the highest earnings growth of all 11 sectors at a massive 299%.

Solid earnings growth, but with a caveat…

Second quarter earnings season appears less impressive if you look under the hood. Energy’s contribution to overall Q2 earnings growth is so disproportionate, if you exclude the sector, the S&P 500 would be reporting a year-over-year decline in earnings of 3.7% (see chart).

The energy sector also is expected to be the largest contributor to earnings growth for the S&P 500 for calendar year 2022. If energy is excluded, the estimated earnings growth rate for the index for the year drops from 8.9% to 2.4%.

The rise in crude oil prices in 2022 has fueled the sector’s profitability. Oil prices recently dropped below $100 per barrel, giving relief to consumers, but they remain elevated largely due to supply constraints and projections for better economic growth.

Read This Story: Oil Is Still King

This week, the U.S. Energy Information Administration (EIA) reported that crude oil inventories had fallen by 7.1 million barrels from the previous week, due to greater demand. At 425 million barrels, U.S. crude oil inventories are about 6% below the five-year average for this time of year.

Rising demand for oil is a bullish economic indicator. Indeed, earlier this week, we got retail sales data for July that revealed consumers are still spending at a decent clip, despite rising inflation and higher borrowing costs. But if oil prices get exorbitant again and shoot past $100/bbl, it could choke the economy.

For the time being, stronger energy demand, resilient retail sales, rebounding manufacturing activity, cooling inflation, and a robust job market all suggest that fears of a full-fledged recession are overblown.

Basis point rate hikes of 75 or 100 are probably off the table for September, but don’t pin your hopes on the central bank. Fed Chair Jerome Powell has sworn off guidance, which means investors are only hearing what they want to hear.

The economy remains fragile and the investment environment is fraught with uncertainties. Where can you still find solid growth plays, without shouldering undue risk? I can sum it up with a single word: takeovers. When a takeover is triggered, the profits that spill out have life-changing potential.

In this era of war, inflation and pandemic, corporate consolidation is the name of the game. Even the whisper of a “mega-merger” can hand investors enormous returns. My colleague Nathan Slaughter, chief investment strategist of Takeover Trader, just pinpointed a potential takeover deal that could dwarf them all. Click here for details.

John Persinos is the editorial director of Investing Daily.

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