The stock market has been almost unstoppable recently. Until today, the S&P 500 had notched eight record closes in a row. And yesterday, the Dow, NASDAQ and even the Russell 2000 all broke through to new all-time highs.
The reality is there are three catalysts lighting a fire under the market’s belly. First, we have the Federal Reserve. As I discussed last week, the Fed decided it will start this month to reduce, or “taper,” its recent quantitative easing policy, with a plan to bring it to a full stop by June. Now, Wall Street was anticipating the Fed to curtail its quantitative easing by up to $30 billion a month. Instead, they only decided to do $15 billion per month. That’s nothing. So, that was a huge surprise. And during Fed Chair Jerome Powell’s press conference following the FOMC statement, he refused to say whether the central bank is going to raise interest rates. So, the Fed is still dovish and willing to prime the pump.
It’s clear to me that the Fed remains obsessed with trying to create more jobs. I should note that there are four million jobs missing since the pandemic. But the labor force participation rate is down because some folks chose to retire. And yet, the Fed wants to replace these four million jobs because that’s its mandate.
But the fact of the matter is the economy became more productive as a result of the pandemic. Technological change was also accelerated. It’s one of the reasons for the earnings explosion. You may recall that in the second quarter, S&P 500 earnings grew more than 90% year-over-year and revenue rose more than 25% year-over-year. According to FactSet, for the third quarter, S&P 500 earnings are estimated to increase 39.1% year-over-year and revenue is expected to climb 17.3% year-over-year. So, while earnings growth is decelerating a bit, the third-quarter earnings season is nothing to sneeze at.
Wall Street Refocuses on Earnings
Let me add that investors are growing more fundamentally focused, which is why I’ve been so “gung-ho” on fundamentally superior companies. Yes, investors can become distracted at times and get hooked on weird little themes every now and then, but they are absolutely refocusing on earnings right now. It’s why we’ve seen the stocks I discussed last week – Atlassian Corporation Plc (TEAM), InMode Ltd. (INMD) and Enphase Energy, Inc. (ENPH) – surge on their quarterly results.
On the other hand, just today meme stock AMC Entertainment Holdings, Inc. (AMC) fell more than 9% in the wake of its third-quarter earnings results yesterday afternoon. For the third quarter, the company reported an earnings loss of $0.44 per share on revenue of $763.2 million. Analysts were expecting an earnings loss of $0.53 per share on revenue of $708.3 million, so AMC beat on the top and bottom lines. However, global movie attendance was lower than expected. AMC saw global attendance of 40 million, which was below analysts’ expectations for 42.8 million.
In addition, company management was a little pessimistic during the earnings call, stating: “We wish to emphasize that no one should have any illusions that there is not more challenge ahead of us still to be met. The virus continues to be with us. We need to sell more tickets in future quarters than we did in the most recent quarter, and adjusted EBITDA is still well below pandemic levels.” So, AMC is still bleeding cash and it will take a long time for the company to get back to its pre-pandemic levels.
The fact of the matter is that at the end of the day, longer-term investors want security, i.e., high-quality stocks that are growing their sales and earnings. They don’t want to be invested in stocks with uncertain futures.
The third reason behind the broader market strength is the decline in the 10-year Treasury yield, which fell below 1.5%. As a result, money is pouring into the stock market. Keep in mind that while China has higher yields, the country has devalued its currency in the past and its economy is a mess. Japan has zero interest rates, Europe has negative interest rates, and Britain is fighting a negative interest rate trend. So, that leaves the U.S. We have higher interest rates than the rest of the world and a better economic system.
With all that said, the stock market is overbought now. Through last Friday, the S&P 500 had been up 16 times in the prior 18 trading days. According to Bespoke, it’s been 30 years since the S&P 500 has climbed so consistently. If you look back to 1952, this trading action has only occurred eight other times. Suffice it to say, this is a rare occurrence. Bespoke also found that the S&P 500’s performance isn’t quite as strong, but, overall, the S&P 500 was still up in the next year. So, the stock market is likely to stay overbought for the foreseeable future, which means further gains are still to come.
With the market expected to continue climbing higher, now is the time to invest if you haven’t already. Keep in mind that we’re in the midst of an “early January effect,” which tends to get underway in November. Many of my Accelerated Profits small- and mid-cap stocks are already benefitting from this early January effect. This isn’t too surprising as my Accelerated Profits stocks have superior forecasted sales of 35.6%, earnings growth of 289.2% and a strong earnings surprise history of 51.2%. So, I expect these fundamentally superior stocks to become go-to names for investors as we move deeper into the seasonally strong time of year.
To further take advantage of the coming strength, I will be releasing a brand-new small-cap stock in Accelerated Profits on Thursday, after the market close. It recently reported record quarterly sales and rallied nicely on the results. I see plenty of upside potential for this stock, so sign up now so you’re ready to pull the trigger after my recommendation is out on Thursday.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Enphase Energy Inc. (ENPH), InMode Ltd. (INMD), Atlassian Corporation Plc (TEAM)