As reggae legend Jimmy Cliff sang: “Sitting here in limbo, but I know it won’t be long.”

The stock market rally in recent days seems to have lost steam, as investors wait to get clarity on interest rates at the next Federal Reserve meeting on July 25-26. Between now and next month’s Fed confab, the markets are likely to remain range bound.

Limbo is a frustrating place to be, but as I explain below, it won’t be for long. Conditions are ripe for a breakout in the latter part of 2023.

The overall mood on Wall Street remains cautiously bullish. The S&P 500 and NASDAQ are on pace for their fourth positive month in a row. Investors continue to redeploy capital to risk-on assets, as the bear market of 2022 gradually becomes a distant memory. I have no desire to contradict the markets and therefore remain hopeful.

That said, stocks fell last week and this week has gotten off to a lukewarm start. Although technology stocks have experienced a strong rally in recent months, they continue to retreat. It’s actually healthy that some of the froth is coming off the tech sector, where valuations have gotten rich again.

Nevertheless, the S&P 500 is maintaining a year-to-date return in the low double digits and it hovers above its 50- and 200-day moving averages. The CBOE Volatility Index (VIX) sits sell below the threshold of 20, which indicates less stress in the markets. Market breadth has improved.

Looking at specific sectors, real estate, energy, and materials stocks are performing well, and commodity prices are rebounding.

The price of gold is likely to continue rising, amid geopolitical fears and the aborted insurgency by the Wagner mercenary group against the Kremlin. The shenanigans in Russia are far from resolved.

Over the past month, the consumer discretionary and technology sectors have been the top performers, with respective gains of 11% and 10%. The strength of the economy and the impressive performance of large-cap tech companies contributed to this leadership.

The utilities sector and other safe havens have racked up losses over the past month, whereas industrial sectors have shown promise. This divergence reflects a sense of cyclical optimism. Financials have posted a moderate recovery since the banking crisis in mid-March. The economy is cooling, largely thanks to Fed tightening, but neither is it lapsing into a deep recession.

Following the previous week’s decline, which put an end to the S&P 500’s streak of consecutive weekly gains at five, the markets fell on Monday.

That said, the main U.S. stock market indices on Tuesday bounced back from these recent declines and closed higher as follows:

• DJIA: +0.63%
• S&P 500: +1.15%
• NASDAQ: +1.65%
• Russell 2000: +1.46%

Tuesday’s rise marked the Dow’s first win in seven sessions; it was the S&P 500’s first positive session in three. The tech-heavy NASDAQ led the turnaround. Crude oil prices settled more than 2% lower, as traders worried that the economic slowdown would dent energy demand.

Earnings in focus…

Corporate earnings will exert a major impact on the markets for the remainder of the year. Despite the focus on the Fed’s decision to pause interest rates, I believe that earnings results from companies will play a crucial role in shaping market trends.

First-quarter earnings reports exceeded expectations, supporting the market rally of the past two months. Investors will closely monitor whether this resilience can be maintained amid a slowing economy.

For Q2 2023, the estimated year-over-year earnings decline for the S&P 500 is -6.5%, according to research firm FactSet. However, after declining from March 2022 through February 2023, the overall percentage of Buy ratings among Wall Street analysts has increased over the past four months, to 54.8% from 53.2%.

At the sector level, energy (64%), communications services (62%), and information technology (60%) lead the way in Buy ratings (see chart):

FactSet reports that corporate profits are expected to gain momentum in the second half of the year, which should provide a tailwind for equities.

For calendar year (CY) 2023, analysts are projecting earnings growth of 1.1% and revenue growth of 2.4%. For CY 2024, analysts are projecting earnings growth of 11.7% and revenue growth of 4.9%. The market appears to be catching its breath, before the next sprint forward.

WATCH THIS VIDEO: The Fed and The Wisdom of Inaction

Editor’s Note: I just described reasons why you should remain bullish. However, if you’re still nervous about the risks I’ve just described, I suggest you consider the advice of my colleague, Jim Pearce.

Jim Pearce is chief investment strategist of our premium service Mayhem Trader. He has spent the past year perfecting a powerful indicator that’s designed to make money in a hostile market.

Jim has a proven knack for reaping profits from Wall Street mayhem. To learn more, click here for his latest video presentation.

John Persinos is the editorial director of Investing Daily.

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