The warrant market june 29 2022 green. However, monetary policy will continue to greatly influence the stock market.
Tighter monetary policy will hinder market rallies in the long term.
Now is the fourth quarter of a bad year for stocks, as the S&P 500 is down about 25%. With the market at its current oversold level again, the impending earnings season could bring a short-term recovery but is unlikely to last long.
The most challenging issue facing the market for the rest of the year and possibly the first half of next year remains the direction of monetary policy. A drop in the Fed's financials amid tightening financial conditions has been the story of 2022 and will likely be the story for at least the first quarter of 2023.
Revenue drives nominal growth
The market is likely to see a decent bounce in the coming weeks as earnings season kicks in. Earnings estimates are generally falling, but don't be surprised if they turn out better than expected.
One reason is that estimated sales for the S&P 500 index are still strong and still trending higher. Sales estimates are a function of nominal economic growth, not real economic growth, and should be considered nominal.
That's why sales estimates not only held but also rose after two consecutive quarters of negative GDP growth. Because during the same period, when real GDP falls, nominal GDP continues to rise, and the estimate of sales to nominal GDP is higher. So when companies report results this quarter, it should come as no surprise to see better-than-expected numbers, especially in terms of revenue.
S&P 500, GDP CUR$ Index, GDP CHWG IndexS&P 500, GDP CUR$ Index, GDP CHWG Index
This can give investors the expectation that all will be well, and that the stock market could recover in a few weeks. But that will change the course of monetary policy, by which time the Fed will raise rates to between 4.25% and 4.50% and potentially higher later today when it reports {{ecl- 733||CPI} are hotter than expected } and keep them there for a while.
Alternative solution
Also, stocks are inherently expensive compared to bonds, and any rally in stock prices will make them more expensive. Unfortunately, for the first time in more than a decade, there is an alternative to stocks, and that makes stocks less attractive.
The spread between the dividend yield on the S&P 500 and the 10-year Treasury note has widened to more than 2%. That is the largest disparity since 2010 and the equivalent of a period not seen since the mid-2000s.
S&P 500 Dividend Yield To 10-Year Treasury Spread DailyS&P 500 Dividend Yield To 10-Year Treasury Spread Daily
S&P 500 PE is still too high
The problem is that the last time the spread between dividend yields and 10-year bonds was this large was in the mid-2000s, and the S&P 500's PE ratio traded at a lower valuation. During that period, the PE ratio traded as low as 14, compared with today's valuation of 15.7. While not much lower, it does suggest that the S&P 500 remains below current levels.
S&P 500 Dividend Yield To 10-Year Treasury Spread DailyS&P 500 Dividend Yield To 10-Year Treasury Spread Daily
Additionally, if 10-year yields continue to rise, it is only likely to widen that spread further, meaning that the S&P 500 dividend yield will need to catch up with the rise in interest rates. 10-year bond yield. When dividend yields fall, it drives down the value of the S&P 500.
At this point, the stock market could get a much-needed short-term rally, but it doesn't look like the long-term uptrend in the stock market is likely to begin until the cycle tightens. Fed currency ends.