The Bear Market Rally Could Go Even Higher, Here’s Why

Stocks jumped again today in response to a pair of Big Tech earnings “beats.” Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) reported their quarterly results after the closing bell yesterday, and shareholders were happy to see both companies easily surpass analyst estimates.

Thus far, earnings season has been a bit of a mixed bag. Wednesday’s rate hike and Thursday’s Q2 GDP report drove stocks higher over the last two trading sessions.

But investors were concerned that weak earnings could rip the major indexes lower once more heading into August.

That obviously didn’t happen, though, and instead, bulls may have found new momentum to carry the market’s recent rally even higher.

“Starting from a position of depressed sentiment and bearish positioning was an asset, but the bigger picture was a subtle shift in inflation and inflation expectations, and thus the market’s expectation for the Fed’s path,” said Baird strategist Ross Mayfield.

“Of late, corporate earnings resilience has only added to the bull case and likely put a near-term floor under equity markets.”

But Mayfield isn’t necessarily ready to call an end to the bear market just yet.

“This may just prove to be a bear market rally in the end – they are very common during longer bear markets – but the combination of rate reprieve, bearish sentiment and positioning, and corporate and consumer resilience in the face of inflation has been enough to spark a rally in risk assets,” he added.

Lauren Goodwin, portfolio strategist at New York Life Investments, correctly observed this morning that the market is back in “bad news is good news” mode with more rate hikes approaching to close out the year.

“The market is taking on a hope that slowing economic growth is going to result in a more dovish Fed moving forward, even if it’s a little further out,” she said.

“So it would make sense to me that weaker rates expectations moving forward would result in a little buoyancy in the equity markets.”

Strong Big Tech earnings and a dovish Fed? Bulls couldn’t ask for more. That’s not to say stocks won’t retrace in the coming days, though.

The S&P is up a whopping 4.8% since Wednesday morning. In the very short term, stocks certainly look overbought.

But the bear market rally might have higher to go before finally losing steam now that the market’s top stocks have all reported earnings. Apple, Microsoft, Google-Parent Alphabet, and Amazon are the market’s four biggest stocks. Collectively, they make up over 20% of the S&P 500’s total market cap.

Only Alphabet “missed” on Q2 earnings. The other three topped analyst estimates, and because these stocks command so much market cap, it’s likely that the general market will run higher on renewed earnings optimism.

Bulls still face significant challenges long-term, but traders should enjoy the short-term rally for now while being mindful of potential exit points. Because, as has been the case for months, traders are more interested in “selling the rips” than “buying the dips.” And the “rip” of the last three days has been a big one.


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