Stocks closed lower Friday to cap a volatile week that finished with losses after Fitch downgraded its U.S. credit rating below the top AAA level, which sent U.S. Treasury yields on a wild ride. Friday marked the final day of the busiest week in the second quarter earnings season, with Amazon jumping more than 8% to its highest in nearly a year following a strong beat and raise, while Apple fell nearly 5% after reporting lower revenue than the year earlier quarter.

As the US continues to defy a year of incorrect recession forecasts, a growing number of economists are beginning to  concede that the economy is headed for a soft landing—meaning Fed Chair Jerome Powell’s interest rate hikes will succeed in subduing inflation without a downturn that causes unemployment to spike. Claudia Sahm – who created the Sahm rule that states that the economy is contracting when the three month moving average of the unemployment rate rises by 0.5 percentage point relative to the low point during the previous 12 months, confessed, as Sahm’s indicator was nowhere near the threshold, that “everyone who is a macroeconomist, including myself, has made some very big errors thinking about the economy since the pandemic showed up”.

Future Wealth’s View

With unemployment again near record low levels, the stock market is close to being back to levels before the correction and is poised to begin another bull market run. The two measures that could signal the beginnings of a bull market are economic data and corporate earnings. 

Economic data continues to reinforce the soft landing scenario. Healthy job and income gains point to an economy capable of weathering any fallout from the Federal Reserve’s rapid interest rate increases over the past year, which has tamed high inflation. That’s also contributing to renewed confidence among consumers, which bodes well for spending and growth.

Earnings this quarter have been impressive – almost half way through the Q2 earnings season and 81% of firms have beaten estimates on earnings, the highest figure since 3Q21 or the past seven quarters.

With everyone from the Fed to economists at major universities eating humble pie, the focus will now turn to the Wall Street pundits who will now update their end of year S&P 500 forecasts and turn bullish from being bearish all year. Of course, many of them will be wrong as well. The economy and the stock market has a way of humbling even the very best. As the saying goes “Humility is the ability to give up your pride and still retain your dignity.”