Welcome to my latest Mind Over Markets video. The article below is a condensed transcript; the video contains additional details.

We’ve enjoyed a powerful stock market rally in recent days, as investors look past hotter-than-expected inflation to focus on fourth-quarter earnings beats from bellwether companies.

The year so far has been marked by volatility in both stocks and bonds. Stocks surged in January, slumped in February, and surged again last week (see my video for several charts).

Stocks closed mostly in the green Monday, March 6, with the Dow Jones Industrial Average and S&P 500 building on last week’s gains and the NASDAQ taking a slight breather.

Investors are skittish as they await Fed Chair Jerome Powell’s testimony in Congress on Tuesday and Wednesday. Here’s hoping that Powell lets slip the word “disinflationary.”

Most impressive so far this year has been the tech-heavy NASDAQ’s rebound, as investors pile back into interest-rate sensitive growth stocks. The benchmark 10-year Treasury yield has stayed below the key 4% threshold. As of this writing after the closing bell on Monday, the yield hovered at 3.96%.

International stocks have performed well, too. The European Union’s economy, in particular, has shown unexpected resilience despite the disruptions of the Russia-Ukraine war.

The big question, of course, is whether we’re witnessing a Fear of Missing Out (FOMO) rally or an upward trajectory that’s sustainable. Much of the answer hinges on Q4 corporate earnings.

For Q4 2022, with nearly 100% of S&P 500 companies reporting actual results, 69% of S&P 500 companies have reported a positive earnings surprise and 65% have reported a positive revenue surprise. For Q4 2022, the blended earnings decline for the S&P 500 is -4.6%.

During the months of January and February, analysts lowered earnings estimates for the first quarter by a larger margin than average, due to worries about a Fed-induced recession.

Looking further out, 10 sectors witnessed a decrease in their bottom-up earnings estimates for calendar year 2023, from December 31 to February 28, led by consumer discretionary (-6.3%), materials (-5.7%), and real estate (-5.7%).

Consumer staples (+0.2%) was the only sector that recorded an increase in its bottom-up earnings estimate for CY 2023 during this period, a reflection of economic anxieties.

For the equity rebound of early March to have legs, this trend toward downward earnings revisions would need to bottom out. We’d also need to see Fed policy get less hawkish.

Wall Street’s forecasts currently call for three additional rate hikes in 2023, at the March, May and June meetings of the Federal Open Market Committee (FOMC).

These rate hike expectations would bring the federal funds rate to about 5.5%. The fed funds effective rate currently hovers at 4.57%.

I expect the Fed to pause rate hikes by mid-2023. Keep in mind, interest rate increases have a lagging affect on the real economy and consumption. We’ll probably start to see these disinflationary effects in new economic data.

The week ahead…

Economic data scheduled for release in the coming days could provide an inflection point for stocks. The salient reports include:

Factory orders (Monday); Fed Chair Jerome Powell’s testimony to the Senate (Tuesday); ADP employment, continuation of Powell’s testimony, job openings, and the Beige book (Wednesday); jobless claims (Thursday); and the U.S. unemployment rate (Friday).

Powell’s testimony makes me nervous; it’s usually a minefield for the market when Powell starts to speak off the cuff. He’s likely to get flack in Congress from both the right and left of the political spectrum.

However, if we see signs in Friday’s employment report that rate hikes are cooling the hot jobs market, Wall Street might stage a relief rally.

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John Persinos is the editorial director of Investing Daily.

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