Investors see bullish signals below the surface of the stock market


It’s been a tough time for stocks. Beneath the surface of the market, some investors are seeing promising signs.

The S&P 500 has risen or fallen by at least 1% on six of the past nine trading days, as concerns over the war in Ukraine, high inflation and the trajectory of interest rates rattled the market. The benchmark US stock index recently suffered its first correction, or decline of at least 10% from a recent high, since the start of the Covid-19 pandemic. It is now down 9.2% this year, including last week’s 1.3% decline.

Despite the volatility, a variety of individual stocks broke out. Among those setting records last week was candy maker Hershey Co.

HSY 2.25%

oil giant Chevron Corp.

CLC 1.56%

Union Pacific Corp railroad company.

UNP 3.59%

drug distributor AmerisourceBergen Corp.

ABC 1.26%

and the Berkshire Hathaway Inc conglomerate.

BRK.B -0.73%

Many investors see reason for optimism when stocks from different corners of the market rally simultaneously. Such movements suggest the foundations for a sustainable advance, even if this has not yet materialized at the level of the main stock indices. This contrasts with periods in recent years when big tech stocks rallied the market while other sectors languished.

“It can’t last forever, so I think it’s a healthy development,” said Hank Smith, head of investment strategy at Haverford Trust. “Even with another week of declines, what you see is there is buying power there.”

Tech stocks have retreated this year as the Federal Reserve’s plan to raise interest rates weighs on the high value investors place on these companies’ future earnings. Losses in sectors ranging from industrials to financials to healthcare were less severe and the energy group soared.

In a sign of the outsized influence of big tech companies, the market value-weighted S&P 500 lags a version of the index in which every component is equally weighted. The S&P 500 Equal Weight Index is down 5.9% in 2022.

Investors will take a look at new inflation data this week ahead of the central bank’s meeting, which begins March 15. They will also analyze earnings reports from Campbell Soup Co..

Beauty Ulta Inc.

and software company Oracle Corp.

for insight into cost pressures and customer demand.

While recent stock market declines could set investors back, some point to signs stocks are poised to rebound. Profits for large US companies are expected to rise more than 8% from 2021, and the stock market looks cheaper than it has been since the early days of the pandemic following the recent sell-off. The widespread sell-off on geopolitical news shows a rush to risk but not fundamental weakness that would weigh on longer-term stocks, these investors said.

“It doesn’t feel good right now, but it does point to the potential for a big improvement of this magnitude,” said Shannon Saccocia, chief investment officer at SVB Private Bank.

On Wednesday, for example, more than 90% of S&P 500 stocks rose after Fed Chairman Jerome Powell said he would propose raising interest rates by a quarter of a percentage point this this month. Some investors feared the Fed would raise rates by half a point. Higher rates tend to put pressure on stock market valuations by reducing investors’ risk appetite and eroding the value that analysts place on future corporate earnings.

Certainly, other technical indicators have been dismal. The market decline has been so widespread that the percentage of S&P 500 stocks trading above their 200-day moving averages recently hit their lowest level since May 2020. And in late February, the 15-day moving average percentage of S&P 500 stocks down in a trading session hit one of its highest levels since March 2020, according to brokerage Instinet.

It is too early to tell how much the effects of the war in Ukraine and the resulting sanctions against Russia will affect the global economy. Commodity prices from wheat to corn to aluminum hit multi-year highs and oil topped $100 a barrel for the first time since 2014. Gasoline prices have already topped $5 dollars per gallon in some parts of the country.

Mr Powell said on Thursday that the Russian invasion was likely to drive up inflation. He indicated that the Fed would not tolerate a period of significantly higher inflation, even if it meant stifling economic growth.

So far, analysts have not lowered their earnings growth forecasts for the year, although first-quarter estimates have come down slightly. Earnings for S&P 500 companies are expected to climb 8.6% this year, versus growth forecasts of 7.2% as of Dec. 31 and 8.4% two weeks ago, according to FactSet.

The pullback in equities makes the U.S. stock market look the cheapest since the spring of 2020. The S&P 500 last week traded at about 19 times its projected earnings over the next 12 months, about where it was trading in February 2020 before shares slumped on concerns over how the Covid-19 pandemic would hurt the economy.

“I view this year as a race between earnings growth and PE contraction,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “The question is: who will win the race?

Conflicts like Russia’s invasion of Ukraine have historically depressed stock prices and driven up the value of some commodities. The WSJ’s Dion Rabouin explains the investor psychology that moves markets. Photo: Justin Lane/EPA-EFE/Shutterstock

Write to Karen Langley at

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