Last week, the market faced challenges: the Bank of Japan was unexpectedly hawkish, and the US labor market report showed unemployment rising to 4.3%, causing rapid market reactions.
However, trends are more important than single reports, writes eToro analyst, Sam North. The unemployment rise was mainly due to temporary layoffs from Hurricane Beryl, which should reverse next month. Even if the jobs report signals bigger issues, the Fed has tools to respond. With interest rates at 5.25%-5.50% and ongoing tightening, there’s room for action if needed. The Fed’s flexibility supports my positive outlook on stocks.
Solid earnings growth is another reason to not panic. With most of the S&P 500 reporting, earnings are up 11.5% annually, the fastest since late 2021, and revenues have grown for 15 quarters straight. Strong economic growth also supports optimism. US GDP grew by 2.8% in the second quarter, continuing a trend of over 2% growth in seven of the last eight quarters.
While the ISM Manufacturing PMI falling 1.7% in July raised concerns, one report doesn’t mean the economy is in trouble, especially in an election year with expected fiscal support.
Technically, the market has been influenced by the carry trade, where investors borrow in low-yield currencies to invest in higher-yield ones. The yen was popular for this, but recent moves by Japan’s Ministry of Finance and a hawkish Bank of Japan caused volatility and unwinding of these trades, as well as other markets including equities and commodities like gold.
In summary, recent market moves seem overdone and not aligned with economic fundamentals or monetary policy. I believe stocks will continue to rise in the medium term, though the path might be bumpier.
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