Bond Yields and an Intense Earnings Season Could End This Market’s Momentum Completely

With the exception of today, which I think is more of a blip, the market is quite jittery, unstable, and has a penchant for selloffs. And really, a lot of this comes down to The Fed. Good data keeps coming about job growth, which means that The Fed is less likely to cut interest rates. This news sends treasuries up, making stocks more expensive in relation to bonds, which has an adverse effect on the amount of buying individuals are doing. For example, the yield on the ten-year is drawing closer to 4.8%, a number which exceeds the projected annual growth rate of the market (3%) over the next half-decade, according to Goldman Sachs.

These bond yields are making the market look more expensive when it does not need any more help looking expensive. Price-to-earning ratios are approaching 2022 values, which would make this market one of the more expensive in history. Meanwhile, you can get a guaranteed 4.8% rate on your money from the government.

So where is the optimism? How is there a bull market in this scenario? The market needs to have a stellar earnings season to reset the vibes, which is good timing because earnings are coming out with rapidity starting later this week, with Taiwan Semiconductor releasing earnings tomorrow and other important companies following in the coming weeks. Earnings should pop about 12% compared to last year, which is weaker than expected a few months ago, but still pretty strong. For reference, the earnings growth y/y was 11% for Q4 2023.

The market is espescially weird right now because of intense concentration. The market, some would say, represents America to a degree. The rich are very rich and are getting richer, while the poor are continuing to struggle. The Magnificent Seven are expected to post, on average, earnings growth of 22% compared to a year prior, which is insane, especially when you compare it to the other 493 of the S&P, which are only expected to post earnings growth of 8%. If any of the Magnificent Seven falter, which is entirely possible in the case of Apple and Tesla specifically, the market could crumble.

And that jab at America, with the rich getting richer… is not just liberal propaganda from me. Right now, wealthier Americans are spending at an unprecedented rate, while poorer Americans are struggling. This is not the Washington Post’s editorial page. I am just pointing this out because it highlights an underlying weakness of this market. Companies that have exposure to lower-income customers like Nike, FedEx, and Conagra Brands (they own Swiss Miss and Pam) have all lowered their guidance.

Those are the facts. Treasury yields are increasing, making stocks look more expensive, which makes investors less likely to buy, which lowers stock prices. The only way to reverse this trend, really, and make the market look less expensive is for the market to post really good earnings, but that might be difficult because every Mag Seven stock has to hit, because they control so much of the market share, or the earnings season is a bit of a failure.

Now, here is my prediction. There is a pretty strong bear case right now, but I am still a bull. I think this earnings season will be positive, on the whole, and I think a major limiter of this market’s growth, fears about tariffs, will disintegrate when Trump places a small tariff or an extremely specific one.

In terms of this earning season reversing a slide as of late, I am moderately optimistic. I think only Apple will slip on their earnings, and I expect continued impressive growth from semiconductor companies, just because I have heard naught about any slowdowns in orders or contracts. Nobody is even tossing that out as an idea, so I think semiconductor companies can power the market forward a bit, or at least, provide it a leg to stand on. I think consumer spending will slow a bit more, especially from lower-income customers, but companies with a B2B focus should not struggle too much, at least right now. Companies that directly cater to the wealthy, like Ferrari, will do well, I believe.

You can already see that latter idea playing out a bit. The big banks like JPMorgan and Goldman just reported spectacular earnings, mostly spurred (COYS) by dealmaking and catering to extremely wealthy business clientele who are snapping up smaller companies.

I think, in three months, by the next quarter, everybody will be much calmer. It might be a choppy next few months, but I think everybody is just digesting the news, and I am not toning down by aggressiveness.