Inflation Is Not the Big Worry

Stocks will likely drift today given the relatively thin economic calendar. To be fair, we do have the July wholesale inflation reading this morning, which was a bit on the hotter side. But pricing pressures are not on top of the market’s worries at this stage.

The pullback in commodity prices in recent days has made last month’s inflation readings, whether in this morning’s PPI or tomorrow’s CPI, relatively dated. The market will be able to see through the transient nature of the pressures in them.

The most important issue for the market is the uncertain U.S. growth outlook. And we will likely need to wait another few weeks before we get a good handle on the economy’s near-term growth momentum. But one thing is getting clearer with the economic releases of the last few days — that the U.S. economy is not heading towards a recession. While growth may be sub-par and below the economy’s long-run potential, it is nevertheless in the positive column.

And the economy’s ability to dodge the recession bullet is a big deal for stocks. Companies know how to profitably operate in a low-growth environment; we got ample proof of that in the first half of the year when corporate earnings growth remained impressive even as the U.S. economy eked out an under-1% growth.

Notwithstanding the recession fears, the economy appears on track to grow at a pace in the back half that is double the first half’s rate. That kind of growth may not do much to bring down the unemployment rate, but that is plenty to sustain the earnings growth momentum going forward. And if earnings expectations for the coming quarters avoid negative revisions, then stocks likely have decent upside from current levels. The relative stability in stock prices over the last few sessions is a reflection of this realization.

We are not hearing anything negative from management teams on the near-term operating environment, at least from the companies still coming out with results. We had Target (TGT) this morning ahead of EPS and revenue expectations, and guided higher. We also got a solid earnings and revenue beat from Ambercrombie & Fitch (ANF). Staples (SPLS), the largest office-supply chain in the U.S., also came ahead of bottom- and top-line estimates and raised guidance.

These positive retail earnings reports run counter to what we heard from Dell (DELL) after the close on Tuesday. The computer maker came ahead of earnings expectations, but missed on revenue and provided a weak outlook. Weakness on the consumer side offset continued momentum on the enterprise side. Limited Brands (LTD) reports after the close today.

It is nice to see the market move in under-100 point increments following the 400-plus points daily moves of the last two weeks. With the economic picture steadily stabilizing, the near-term outlook for stocks is improving.

About Sheraz Mian 45 Articles

Affiliation: Zacks Investment Research

Sheraz Mian is the Director of Research for

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