The narrative on Wall Street has switched from inflation and the Federal Reserve to earnings. The focus on third-quarter corporate operating results has contributed to a more bullish mood, driving stocks higher.

The lack of terrible news in earnings largely explains why stocks have been rising lately, despite elevated inflation, a tightening Fed, a shaky economy, and geopolitical turmoil. Major factors for the divergence are a tight labor market, rising wages, high household savings, and a consumer that’s cutting back but still spending.

For Q3 2022, with about 20% of S&P 500 companies posting actual results, 72% of companies have beaten earnings estimates and 70% have beaten revenue estimates. On average, companies are reporting earnings that are 2.3% above expectations.

As of this writing, the blended Q3 earnings growth rate for the S&P 500 is 1.5%. Not great, but not disastrous.

Four of the 11 S&P 500 sectors are reporting year-over-year earnings growth, led by energy and industrials. Seven sectors are reporting a year-over-year decline in earnings, led by financials and communication services.

The energy sector is reporting the highest year-over-year earnings growth of all 11 sectors at 116.4%. Higher year-over-year oil prices are contributing to the improvement in earnings for this sector. The average price of oil in Q3 2022 ($91.43) was 30% above the average price in Q3 2021 ($70.52).

The fiercely contested midterm elections in the U.S. are scheduled for November 8, and we’re awash in political demagoguery. Specifically, you’re probably hearing a lot of rhetoric about inflation, and most of what you’re hearing is false.

Government assistance during the pandemic, aid to Ukraine, supposed restrictions on energy production…these factors aren’t behind higher inflation.

Inflation has been largely driven by higher costs for energy and food, due to COVID-induced supply imbalances and the global chaos unleashed by the Russia-Ukraine war.

Big Tech on deck…

Global economic headwinds have not clobbered corporate operating results, so far. Despite recession fears, corporate profitability is holding its own.

After the closing bell Tuesday, a batch of earnings reports from the tech sector poured in. Alphabet (NSDQ: GOOGL) missed on both earnings and revenue; Microsoft (NSDQ: MSFT) beat on earnings and revenue but reported weaker-than-expected growth in the crucial cloud segment; Texas Instruments (NSDQ: TXN) beat on earnings and revenue; and Spotify (NYSE: SPOT) missed on earnings but beat on revenue.

Before the opening bell Wednesday, economic bellwether Visa (NYSE: V) beat on earnings and revenue, as the American consumer holds steady on spending. The company’s chief financial officer, Vasant Prabhu, made a statement that nicely explains the dichotomy between gloomy news and resilient corporate earnings:

If you just looked at our numbers and didn’t look at what people are writing or saying in the media, you wouldn’t think there’s all this anxiety or uncertainty out there or that people aren’t feeling good about things. The numbers have been steady for nine months and spending is stable almost everywhere in the world and quite strong.

U.S. Treasury yields have been falling, as fixed-income investors reassess Federal Reserve monetary policy. Many on Wall Street expect the Fed to get less hawkish in early 2023.

In recent weeks, falling Treasury yields have been a bullish factor for stocks, although yields are still historically high, with the benchmark 10-year Treasury on Wednesday hovering at 4.07%.

Generally strong earnings results have propelled stock gains in recent days, taking some of the sting out of negative inflation data.

Meanwhile, in another sign of economic contraction, home prices are falling. The S&P/Case-Shiller U.S. National Home Price Index, released Tuesday, showed that residential home prices in August were 13% higher than the same month last year, but below the 15.6% witnessed in July (see chart).

The month-over-month drop is the largest on record, as higher interest rates make homes less affordable. This dynamic has taken a toll on consumer confidence, with the Conference Board’s consumer confidence index slumping in October.

However, the housing slowdown is disinflationary, which is beneficial. Housing comprises about one-third of the consumer price index (CPI); shelter costs have been among the hottest components of CPI inflation.

WATCH THIS VIDEO: Sustainable Rally or…Another False Hope?

On Wednesday, the major U.S. stock market indices closed mixed in choppy trading, as follows:

• DJIA: +0.01%
• S&P 500: -0.74%
• NASDAQ: -2.04%
• Russell 2000: +0.46%

Many intrinsically strong stocks are now trading at appealing valuations. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 is 15.6, which is below the five-year average (18.5) and below the 10-year average (17.1).

The argument for increasing your exposure to the stocks on your “wish list” is compelling. The average analyst expectation is for the S&P 500 over the next 12 months to reach a target price of 4604.46, which is about 19% above its level (as of this writing on Wednesday).

Editor’s Note: I’m holding a special investment Town Hall on November 1, called “The Marijuana Millionaire Countdown.”

As the U.S. midterm elections rapidly approach, I’ll explain the little-known reason why federal legalization of marijuana could be days away…and why a slew of states are poised to create new state-legal markets.

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John Persinos is the editorial director of Investing Daily.

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