That’s led to increased worries that stocks may soon experience a so-called correction, defines as a 10% pullback from recent highs. Stocks haven’t gone through one since the Covid lockdowns in March 2020, which created a brief bear market and led to a more than 20% slide from a prior peak.
US stocks were flat Wednesday.
Earnings growth slowing. That may not bode well for stocks
Few are predicting that the Delta variant will send the US economy grinding to a screeching halt however. That’s largely due to the fact that millions of Americans are vaccinated and businesses may be reluctant to shut their doors again.
As a result, investors may not be able to bank on as huge a rebound from any Delta-induced slowdowns.
“Consumers and businesses have already purchased PCs, networking equipment/software, automobiles, houses and other durable goods and would not need to buy more,” John Vail, chief global strategist with Nikko Asset Management, said in a report.
“Thus, the economy would not rebound sharply. In this case, it would be best to wait for a major correction,” he added.
Strong corporate earnings reports have helped fuel the rally. But there is a growing sense that this could be as good as it gets for earnings for the foreseeable future.
Profit growth likely peaked on a year-over-year basis in the second quarter.
Earnings will likely continue to increase, but the pace is expected to slow dramatically in the second half of this year and in 2022 — especially if the Fed begins to cut back on, or taper, bond purchases later this year and possibly raise interest rates as soon as next year.
“The cliff between the economic indicators and the equity prices is somewhat unreasonable, hinting that there is potential for a sizable downside correction,” Ipek Ozkardeskaya, senior analyst at Swissquote, said in a report.
Don’t bet on another huge meltdown like March 2020
Few are predicting that another major bear market rout like last year is looming on the horizon again.
But investors should be looking outside of the momentum/growth sectors, said Steve Goddard, founder and chief investment officer of The London Company. Goddard told CNN Business that there is an “unusual discount for quality value companies.”
“We’ve been surprised by the strength of the market through this year and over the past couple of years,” said Brian Macauley, portfolio manager with the Hennessy Focus Fund.
“You look at the tech sector being up as much as it is but everything else has lagged. There is a wide chasm and we’re deep into this fairly ebullient market environment,” he said, noting that he is looking for companies in “not hot” sectors that offer more safety and trade at lower valuations.