The rebound in the stock market ended after bad news from Apple, but there is reason to think inflation has peaked and stock valuations have digested the worst risks. The U.S. stock market opened high and closed low on Monday (July 18), with the Dow Jones Industrial Average closi

The rebound of the stock market ended after bad news from Apple, but there is reason to think that inflation has peaked and stock valuations have digested the worst risks.
The U.S. stock market opened high and closed low on Monday (July 18), with the Dow Jones Industrial Average closing down 0.7%, and the S&P 500 and Nasdaq both closed down 0.8%. Among them, the Dow Jones Industrial Average hit its biggest decline in more than two weeks. In the past seven trading days, the Dow Jones Industrial Average and the S&P 500 have fallen in 6 trading days. "The news about Apple's (AAPL) plan to slow down its recruitment and spending next year is the main reason for the stock market to turn from rising to falling, and investors are beginning to question whether the market's expectations for corporate profits are too optimistic." But Barron's believes that investors should not lose the hope that "the stock market has bottomed out."




Barron's magazine reported on Tuesday (July 19) that the focus of investors' debate is whether the stock market has bottomed out or another wave of selling wave that will hit new lows.

bulls' views are mainly focused on inflation may have peaked.

Although CPI rose 9% year-on-year in June, commodity prices fell sharply in the past month, with oil prices and copper prices falling 17% and 33% respectively from their peak in 2022. This not only means that the Fed rate hike has begun to play a role in weakening demand, as oil ranks about 12% in the CPI basket, it also means that the decline in oil prices may pull down CPI.




If inflation peaks, the Fed will not continue to raise interest rates sharply as investors fear. In the past few days, expectations of the Fed's possible rate hike by 100 basis points at its July meeting have cooled.

In addition, judging from the trend of the federal funds rate futures market, the Federal Reserve may raise interest rates to around 4% at the highest and then cut interest rates next year. This expectation will help alleviate the pressure on the economy and stock markets. Nicholas Colas, founder of

DataTrek, wrote in a research report: "regardless of whether the Fed raises interest rates by 75 basis points or 100 basis points next week, the factor that has a greater impact on stock prices has become the market's belief that the Fed is preparing to stop the interest rate hike cycle." The decline in

bond yields also reflects expectations that inflation may peak and the Fed will not continue to raise interest rates sharply. The 10-year U.S. Treasury yield hit a multi-year high of around 3.5% in mid-June and has now dropped to a level of just below 3%. The S&P 500's total expected P/E ratio has now stabilized at around 16 times after falling from a level slightly above 20 times at the beginning of the year.

shows that stock valuations have reflected the most serious risks. After the CPI data was released on July 13, the stock market recovered most of its lost land, and the Nasdaq fell by only 0.2% on the same day. This means that the stock market has digested the threat posed by inflation to the economy. "The market's response to a new high in June last week was unexpectedly flat, which shows that many investors have withdrawn from the stock market." The view of

shorts is mainly focused on the fact that corporate earnings expectations will definitely be lowered.

, which currently accounts for nearly 10% of the S&P 500 market value, has released financial reports, with their profits 3.7% higher than expected, but as interest rates rise and the possibility of a recession becomes greater, profit expectations appear to be lowered next. According to FactSet data, the S&P 500's full-year earnings forecast has fallen by 0.3% in the past month.

22V Research founder Dennis DeBusschere wrote in the research report: "The second quarter financial report may trigger a downward correction of earnings expectations."

Yadney said: "As analysts are just starting to lower their earnings expectations, bears believe that there is more room for downward in the stock market in the future." The good news is that this may also be reflected in the stock price. Yadney said: "The lowered earnings expectations may not be a factor that triggers a sharp decline in the stock market.

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(The content of this article is for reference only, and investment advice does not represent the tendency of "Barron's"; the market is risky, so investment must be cautious.)