For the stock market, earnings represent the sum of all fears. But if they don’t play out the way bearish investors think they will, shares’ next move could be higher.
At any given moment, earnings expectations reflect everything that’s happening in the world, from the economy and the Federal Reserve to interest rates and geopolitics. Right now, most of the fear stems from expectations about the economy. The Fed has lifted interest rates to tamp down inflation by reducing economic demand, and so far, that seems to be working. The rate of inflation has been cut almost in half from its post-Covid peak, but growth is slowing with it: First-quarter gross-domestic-product expansion is set to fall to 1% from 2.1% last year when it’s reported on April 27. And since higher rates operate with a lag, the full effects of the rate hikes probably haven’t been felt yet, raising the possibility of a recession.