Friday's Market Minute: Are Equities In A Sustainable Rally?

The biggest rally in the S&P 500 in three weeks helped lift the spirits of equity bulls. The recent countertrend thrust has not spurred a rise in rates, as the 10 -year yield seems stuck in a tight trading range. Maybe the climb up from the bottom for equities has begun as the desire for risk exposure is still there.

We have had a massive move in interest rates, with the 10-year yield up one-and-a-half percentage points this year, which has already taken a big bite out of asset valuations. The market is back to pricing in a hike of 75 basis points next week by the FOMC even as the labor market is showing signs of cooling. The number of displaced workers filing for unemployment benefits last week rose to the highest level in eight months.

Tighter financial conditions and the cost-of-living squeeze have translated into weaker economic momentum, but the stock market that may have fully discounted inflation and recession risk. Based upon well-anchored long-term interest rates, commodity prices down significantly from year-to-date highs, and a Fed that is most likely going to commit to raising rates based upon what the markets expects, the primary risk to the current short-term rally in equites is earnings.

This week, earnings have shown to be mixed, with the positive standout, Tesla TSLA, posting strong profit metrics and keeping its production forecast in line. On the other hand, Snap SNAP missed revenue expectations and failed to provide 3Q revenue and EPS guidance. This is possibly an indicator of the health of the digital ad market in general, which could manifest into weak reports for larger players such as Meta Platforms META and Alphabet GOOGL scheduled to report next week.

Considering wage inflation, elevated commodity prices, lower sales volumes, and the potential for elevated tax rates, almost all lines in a company’s income statement appear threatened. Price action in equities since late June has been a great relief rally. However, the market has yet to prove whether it is in a sustainable rally.

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