No, I’m not talking about hiking in the Tahoe Basin. I’m talking about interest rate hikes.  The Fed raised rates again despite the data showing the economy weakening and the health of the banking industry in question.  

In his press conference Jay Powell said the Fed might pause its rate increases, perhaps starting with the June meeting. Or it might not. How helpful. Stocks sold off as he spoke and bank stocks led the decline once again. One reason could be this: Powell made it clear the Fed’s priority is fighting inflation with a goal of 2% (it’s currently 4.9%). Not 3% or four. Two percent. We are a long way from 2% and if it can be achieved there would be considerable pain along the way and millions more unemployed. 

The outlook for earnings and interest rates is always the driving force for stock prices and valuations, one that can be a tailwind one week and a headwind the next. If investors anticipate that the end to the rate-raising cycle is at hand, as it in all likelihood is, stocks will respond.

Back to earnings. Estimates come and go and in most cases analysts have at best a so-so record. That said, for the S&P 500 aggregate earnings this year are expected to be $218, up $2 from last year. That reflects virtually no growth. For 2024 S&P earnings are forecast to reach $240, an increase met with considerable skepticism.  

As for interest rates, if asked I would have advised skipping the rate boost. It takes many months for interest rate changes to impact economic activity and the first of many rate boosts began a year ago. Why not wait to see the impact? It could be that the seeds of an economic slowdown have been in place for months, as data show, and a slowdown would lessen inflation pressures. All the data show the rate boosts are taking a toll.  

Bottom line: If one always sees a glass half empty there are reasons to stay wary of the stock market given the near-term earnings outlook, interest rate uncertainties and the debt limit. There always are. I see a glass half full. An estimated five trillion dollars is on the sidelines earning 4-5% in a money market fund or less at a bank. Some of that will come back to stocks, history’s best asset class. Interest rates will level off and eventually retreat, though not likely this year. There are better days ahead.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.