On one hand, investors remain cautious as the economy gradually cools down, particularly with the recent rise in unemployment rates sparking concerns about a potential recession in the United States. In contrast, Wall Street still expects earnings to stay stable, which could potentially drive further gains in U.S. stocks.
In a report released on Thursday, analysts at JPMorgan noted: “While the market's focus was primarily on the inflation trajectory in the first half of the year, it is swiftly shifting towards growth risks in the second half, especially in the context of rising earnings expectations for the second half (+9%) and 2025 (+14%).”
Analysts believe that the current market dynamics revolve around two major issues: potential risks to economic growth and concerns over high stock valuations.
Recession Fears The unexpected rise in last week's unemployment rate triggered the "Sahm Rule" recession indicator, coupled with the possibility that the Federal Reserve might keep policy rates in restrictive territory for too long, these factors have heightened investor fears of a recession. If this happens, it could lead to a significant drop in the stock market.
Analysts also pointed out that the previous market retracement was primarily driven by concerns over slowing economic growth and a reassessment of recession probabilities. This week, the bank raised the likelihood of a recession before year-end from 25% to 35%, while Goldman Sachs increased this probability from 15% to 25%.
Notably, Google search trends for the term "recession" have reached their highest level since June 2022, when soaring inflation and a sharp rise in interest rates intensified investor worries about an economic downturn.
However, the latest employment data seems to have alleviated market concerns about a U.S. economic recession. Consequently, U.S. stocks opened higher and continued to rise on Thursday, with all three major indices closing in the green. Data shows that as of the week ending August 3, the seasonally adjusted number of initial jobless claims in the U.S. was 233,000, down by 17,000 from the previous week, and below the market expectation of 240,000.
Earnings Support Meanwhile, continuous growth in corporate earnings has provided support for stock prices, and may even inject more momentum for further gains in U.S. stocks. So far, 88% of companies in the S&P 500 index have reported their second-quarter results, with 79% of them surpassing earnings expectations with a median increase of 6%. Compared to the same period last year, overall earnings have grown by nearly 12%, far exceeding the 9% expected just a few weeks ago.
Additionally, data from Yardeni Research shows that corporate earnings expectations reached an all-time high last month.
Ed Yardeni, President of Yardeni Research and a well-known Wall Street bull, wrote in a report this week: “The S&P 500 has risen 12.15% year-to-date. We expect some sideways movement for the next few months, with potential risks in the Middle East on the radar, but we remain optimistic about U.S. economic growth and the outlook for U.S. stocks.”
Uncertainty Analysts at JPMorgan pointed out that another important uncertainty investors need to consider is the new wave of uncertainty brought about by Kamala Harris becoming the Democratic presidential candidate. They wrote: “As the gap between the two candidates narrows, but the final policy agenda remains unclear, and Harris's late entry into the race, add extra complexity for investors in pricing election risks for later this year.”
