In early June 2022, the Dow 30 Industrial Average was near its lows of around 30,000. For the next two and a half months, equities rallied, and the Dow reached approximately 34,000 in mid-August. Since then, we have been correcting with a sobering punch last Friday of a 1000 point down day for the Dow after Jerome Powell, Chairman of the Federal Reserve, took a Hawkish stance on interest rates in a short speech delivered in Jackson Hole, Wyoming. He said that the Fed would remain diligent in its fight against inflation and will continue to use interest rate increases as one of its tools to combat climbing prices in our economy.

If we step back and try to view the markets and our economy with a wider lens, the data shows we are in a mixed bag right now, which is why we are in a trading range with equities for the time being. LPL Research says during the second quarter, corporate earnings averaged a 6 – 7% growth rate. Not an exciting number but given the challenges corporate America has faced lately; a slowing economy, inflation pressures, ongoing supply chain disruptions and a surging U.S. Dollar, LPL considers second quarter earnings season a resounding success.

Strong corporate revenue growth in the mid-teens is one big reason why margins are holding up in this inflationary environment. That additional revenue, and the pricing power that helps produce it, provides companies with some margin cushion to help them reach their earnings targets. Analysts’ estimates no longer reflect margin expansion in coming years. LPL knows analysts’ estimates tend to be overly optimistic, but they still view expectations of stable margins as a positive sign for future profitability. That said, earnings targets will be very tough to reach in 2023 if high inflation lingers. The pace of improvement may be stubbornly slow despite some progress toward normalizing supply chains and loosening labor markets.

LPL research still feels good about their $235 number for 2023 S&P 500 EPS, representing only a 4% increase over their 2022 estimate. They’re counting on inflation pressures easing next year while economic growth potentially picks up from the anemic level in the first half of 2022 to provide additional support. Third quarter gross domestic product (GDP) is tracking to growth of 1.6% annualized according to the Atlanta Federal Reserve. And although the Institute for Supply Management (ISM) manufacturing survey has been falling much of this year, the expansionary 52.8 reading in July is a positive earnings signal.

So, we wait and see. We know that market timing is an almost impossible task. We depend on our asset allocations in our portfolios to hold our hands through volatility. When the markets have good or great days, it is imperative we participate, lest we miss out and the market rallies without us. We welcome any investment questions you may have. ~Mark and Elise

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index data from FactSet. This research material has been prepared by LPL Financial LLC. Tracking #1-05320221 (Exp. 08/23).