Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is a B+ (favorable).
THE FED AND ITS POLICIES: This factor is rated C- (Below average). In the minutes from the June Federal Open Market Committee meeting, the Federal Reserve members expressed their desire to begin shrinking its balance sheet before the end of the year, while the European Central Bank’s minutes contained discussions of ending its pledge to buy more bonds if the economy weakened. Rate hikes, meanwhile, are suddenly on the table in countries besides the U.S.
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Of the S&P-500 companies which have reported second-quarter earnings so far, 74% have topped analyst expectations, according to Thomson Reuters I/B/E/S, above the four-quarter average of 71%. Sales have been nearly as strong, as 72% have topped expectations, well above the four-quarter average of 56%. All in all, second-quarter earnings are expected to grow by nearly 10%.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6. These risks deserve our ongoing attention.