By John Stewart
Chief Investment Officer at Farmers Trust Co.

Week in Review: Market Struggles to Gain Traction Despite Tamer Inflation

We had some really encouraging inflation reports this past week.

The annual inflation rate fell to 3.5% year-over-year in June, down from 4.2% in May and below the 3.8% forecast. A drop was expected based on falling oil prices last month, but it fell even more than expected.

Core inflation, which excludes food and energy, fell to 2.6% from 2.9% in May.

Final demand producer prices actually fell 0.3% in June, which should be very helpful to corporate profits – and of course the stock market.

After an initial positive reaction, stocks quickly sold off and the S&P 500 index is lower for the past week. The NASDAQ has performed far worse, with AI-related names coming under pressure, and is down more than 2% in the past five trading days.

So what gives?  Well, renewed hostilities with Iran have oil prices moving back up and could easily lead to higher inflation readings going forward. There is also some concern that the economy is showing signs of slowing down. Keep in mind that the August to October time frame tends to be the most volatile three-month stretch of the year.

Investors are starting to get comfortable with fairly high rates of return on the S&P 500 index.

Many believe that just buying and holding the S&P over the long run will virtually guarantee roughly 10% returns in perpetuity. And it’s been closer to 15% over the past 10 years.

While that all sounds wonderful, past performance is no guarantee of future results, and the S&P 500 index itself has a long history of going through long periods of underperformance.

In fact, the S&P tends to produce 10% to 15% average returns for 15 years or so, followed by periods of flat to down returns for 10 to 15 years. Then the cycle repeats. Well, we’ve been in a bull market for 17 years now. That’s something to be aware of when making your financial plans.

Looking Ahead: Earnings Season Heats Up

We’ve already had some early earnings reports from the major financial institutions like JP Morgan and Goldman Sachs. On the whole, the reports have been quite good.

Earnings season will heat up in the coming weeks with a lot of the major tech firms scheduled to report by the end of the month.

One thing to keep in mind is that earnings expectations are sky high. In fact, by one measure, earnings growth forecasts for the S&P 500 over the next three to five years are as high as they’ve ever been.

Companies will likely report good earnings, but high expectations make it harder to beat, and some firms may be uncomfortable with the unusually high forecasts going forward.

This could lead to some disappointment in some of the forward outlooks as earnings guidance gets revised for the second half of the year.