Why The US Economy And The Stock Market May Be Better Off Than They Seem

The SPDR S&P 500 ETF Trust SPY just completed its first down quarter in two years, and fears surrounding inflation, rising interest rates and global geopolitical tensions have investors worried about the possibility of an imminent U.S. recession.

Lindsey Bell, chief markets and money strategist for Ally, recently said investors currently have more questions than answers heading into the first-quarter earnings season. Bell added that investors may be growing overly pessimistic about the health of the underlying U.S. economy.

Inflation & Consumers: On the inflation front, Bell said investors should make peace with the fact that inflation is here to stay for the time being. But while the war in Ukraine continues to pressure prices, Bell said most economists believe the core Consumer Price Index (CPI) actually peaked in the first quarter. In addition, the Federal Reserve believes inflation will return to more reasonable levels by 2023.

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Meanwhile, Bell noted a massive divergence between consumer confidence and consumer behavior in the first quarter. The latest University of Michigan consumer sentiment report revealed the lowest consumer confidence numbers since 2011. At the same time, Bell said U.S. household balance sheets are currently in fantastic shape, the job market is strong and Americans have more than $2 trillion in excess cash by some estimates.

Valuation & Growth: Finally, despite all the doom and gloom headlines, Bell said the stock market is much less expensive today than it was a year ago based on its forward PE ratio, which is currently in line with its five-year average. Analysts are also currently projecting 9.5% EPS growth and 9.3% revenue growth for the S&P 500 in 2022, a far cry from what investors would expect during an economic recession.

"Recent market trends, the macro environment and stability of corporations should provide some confidence that we are on the right track," Bell said. "And don’t count out the consumer, they may just be what gets us through this slump."

Benzinga's Take: There is no question the market is digesting a major transition from a period of unprecedented government stimulus and dovish Fed policies to a period of quantitative tightening and rising interest rates. In the coming weeks, investors will get some much-needed clarity, and potentially reassurance, about how effectively U.S. companies will be able to navigate this transitionary period.