Could This Be the Next Catalyst to Drive the Stock Market Higher?

July 13, 2021 at 09:53 AM EDT

Last week's holiday-shortened week saw a mix of ups and downs as investors questioned the strength of the reflation trade. Longer-dated yields sank, driven by fears of a risk-off environment, and the S&P 500 (SPY) looked to close down for the week for the first time in three weeks until a rally on Friday drove the markets to new records. This week, I expect to see some possible volatility as investors react to more economic data releases. Still, looking at the big picture, the next catalyst for the markets is earnings season, which starts tomorrow with the release of earnings reports for banks. I will preview earnings season and what that means for our portfolio, but first, let's look at the markets since Wednesday. Read on below…

(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).

Stocks ended higher on Wednesday as investors digested the Fed's June meeting minutes. The release signaled a split on when to roll back crisis-era monetary policies. While some officials expected to start winding down bond purchases earlier than expected, others wanted to wait.

This news followed a labor report showing fewer workers quit their jobs in May, which means that a projected increase in job openings wasn't as significant as previously thought.

On Thursday, the market ended lower due to rising concerns over the COVID-19 delta variant and its potential effect on the global economic recovery outlook. Longer-dated Treasury rates declined to near their lowest levels since February as investors rotated into the safety of bonds.

Weekly initial jobless claims came in at 373,000, above estimates of 350,000, but still near a pandemic low.

Stocks bounced back on Friday as a relief rally erased the week's losses. The major indexes hit records again in their third consecutive weekly advance. It appeared that investors brushed off concerns over economic growth peaking and the COVID-19 delta variant. Longer-dated Treasury yields also bounced back after sliding close to a five-month low.

Stocks shook off earlier losses to end today higher as bond yields rose and investors awaited the first batch of second-quarter earnings reports and key economic data. Some of the biggest U.S. banks are scheduled to kick off the second-quarter earnings season tomorrow.

Market Outlook

As I mentioned earlier, the next big catalyst for markets is earnings season, which starts tomorrow. According to FactSet, analysts expect earnings growth of 64% year-over-year for the quarter, which would be an increase from the 50% growth seen in the first quarter. This growth is expected to be driven by the re-openings and trillions of dollars of fiscal stimulus.

Big banks JPMorgan Chase (JPM) and Goldman Sachs (GS) release their earnings tomorrow, Bank of America (BAC), and Citigroup (C) before the opening bell on Wednesday, and Morgan Stanley (MS) on Thursday.

How does this affect us? Well, I will be looking out for what bank executives have to say in their economic outlook. If their outlook for the second half is strong, that should benefit value stocks generally, but more specifically, our holdings.

In addition to earnings season, Fed Jerome Powell is testifying before Congress with his semi-annual Monetary Policy Report on Wednesday and Thursday. If Powell strikes a more dovish tone, which is expected due to the mixed June jobs report and last week's Fed minutes, I suspect the market and our holdings to react positively.

Overall, I see a continuation of what we have been seeing, but with growth moderating, as I mentioned last week. While the delta variant is a mild concern, the vaccination rates in the U.S. are much better than in other countries, so I expect the economy to keep moving forward, which benefits the markets and our portfolio.

What To Do Next?

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $436.01 per share on Tuesday afternoon, down $1.07 (-0.24%). Year-to-date, SPY has gained 17.38%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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