Investors Bullish About US Stocks Despite Slow Growth and Recession Risk
Investors are optimistic about U.S. stocks despite the unraveling risks of recession and heightened inflation that threatens further interest rate hikes. With the U.S. Federal Reserve expected to hike interest rates by 25 basis points to the 5% level, investors need more clarity about the long-term outlook. Nevertheless, immediate data indicates that investors are increasingly piling up long positions in stocks.
Growing U.S Stocks Bullishness
Over the past week, nearly $9 billion was added to S&P 500 futures, signaling growing confidence about the U.S. stock market. In addition, tech-heavy Nasdaq 100 continues to experience the biggest change in long positions signaling investors’ confidence about tech stocks most susceptible to interest rate hikes and the economy plunging into recession.
Increased investments in U.S. stocks have mostly been fueled by solid earnings reports that signal solid growth metrics amid turbulent economic conditions. While 70% of companies in the S&P 500 have issued their quarterly earnings reports, 79% have posted earnings that topped estimates.
Technology companies most susceptible to interest rate hikes have had an impressive earning season signaling strong demand for the services and products. Google, Amazon, and Alphabet have all delivered solid earnings that topped estimates. The impressive earnings came at the back of the companies embarking on a restructuring drive involving the layoff of staff and cutting expenditures to help shore profit margins.
Economic Growth Slowdown
The impressive earnings report is helping offset weak economic data that has raised serious concerns about the health of the U.S. economy. In the first three months of the year, the U.S. economy wobbled, growing at an annual growth rate of 1.1%. In contrast, the U.S. economy grew at an annual rate of 2.6% in the last three months of 2022.
The slowing growth rate has mostly been attributed to higher interest rates, making it difficult for companies and businesses to access cheap capital needed to fuel economic activity. An aggressive push by the FED to try and tame high inflation through interest rate hikes is likely to hamper further growth. Housing and manufacturing are some of the sectors likely to feel the pinch. Banks’ unwillingness to lend is also expected to affect business investments and job creation.
Amid the slowdown in growth, the U.S. economy has remained resilient amid the shocks. The labor market has remained firm, with more people getting hired and income levels rising. In addition, families are spending more amid the high inflation levels, which is helping drive company revenues leading to earnings beat.
While there have always been fears about higher interest rates, investors are optimistic the FED is nearing the end of its current monetary policy tightening. The next 25 basis point hike is viewed as the last part of the aggressive hike push, which could eventually lead to rate cuts. High expectations that the FED will start cutting interest rates at the end of the year have also helped fuel buying spree in the market.
Nevertheless, the growing risk of recession is also forcing investors to be extremely defensive and cautious. Defensive plays like government bonds and safe havens like the U.S. dollar and gold should continue eliciting strong demand going forward.
