Wall Street traded nicely ahead of the Fourth of July holiday, which isn’t surprising. Main Street is often in a positive mood, looking forward to celebrating the holiday with friends and family. And that mood typically spreads to Wall Street. This year has been no different.
Interestingly, while the stock market has been moving up, interest rates have been collapsing to new lows. The German 10-year bund has fallen below -0.3%. The French 10-year bond yield slipped below 0%. The Swiss 10-year yield dipped below 0% for the first time ever. And the U.S. 10-year Treasury “cracked” 2% before rebounding to sit a hair above 2%.
The interest rate collapse all started in the wake of the European Parliament elections. Existing European leaders were dealt a stunning blow by populist movements, and coalition governments in major countries like Italy and Germany are now expected to have early elections. European leadership is clearly in chaos, and there’s also plenty of disagreement on who should lead the European Commission going forward.
It also doesn’t help that Brexit is still on track for October 31 and multiple countries openly want to violate European Union (EU) budget restrictions. In my opinion, there’s a dark cloud of uncertainty hanging over the EU, and the disintegration of the EU is growing more and more inevitable.
Naturally, the continuing chaos in the EU weakens the British pound and euro. As a result, the U.S. dollar continues to strengthen and remains the preferred reserve currency. That’s also igniting a massive capital flight that is further suppressing Treasury yields.
The recent Federal Open Market Committee (FOMC) statement also weighed on Treasury yields. The Federal Reserve removed the word “patient” and cited that slowing global growth is influencing the FOMC’s interest rate decisions. The Fed never fights market rates, so, as Treasury yields collapse, the Fed has no choice but to slash key interest rates. The Fed is now set up for a potential 0.25% key interest rate cut in July or September.
Fed Ready to Cut Rates
Personally, given recent economic data, I’m now expecting the Fed to slash key interest rates at its July FOMC meeting. Specifically, consumer confidence plunged in June, new home sales declined 7.8% in May, and durable goods orders declined by 1.3% in May. So, the latest economic data will likely cause the Fed to cut key interest rates sooner, rather than later.
So, this is an ideal environment for stock market appreciation.
The stocks I expect to fare the best are the ones with strong earnings growth and sales momentum. Factset is currently forecasting an average 2.6% decline in second-quarter earnings and 3.9% average annual sales growth.
Of course, that doesn’t mean we should avoid stocks until after earnings season. You just need to find the stocks that show strong earnings growth regardless of the broader market trends.
For example, my Growth Investor stocks, are characterized by 65% average annual earnings growth and 16.5% average annual sales growth.
Right now, I’m especially interested in the technology sector. According to Factset, tech is forecasting 24.5% year-over-year earnings growth and 13.4% revenue growth.
My Growth Investor subscribers are already “locked and loaded” with fundamentally strong tech stocks in cybersecurity, artificial intelligence (AI) and 5G. These companies won’t report their quarterly results until August, so now is the perfect time to buy in before they take off. Sign up here for all the details.