Like many investors, I haven’t been optimistic about the short-term outlook for the stock market in a long time. It’s hard to be cheerful when the Nasdaq Composite Index has been in a bear market for months and the S&P 500 briefly entered bear market territory.
To be clear, my positive view of stocks as a long-term investment has not changed at all. However, I have generally been gloomy about the market in the short term. Bye now. Here are three reasons why I feel more bullish on stocks.
1. The possibility that we are in recession
You may be surprised by my first reason for increased optimism. My new bullish attitude is based in part on the likelihood that the US economy is now in recession.
Of course, a recession isn’t official until the National Bureau of Economic Research says so. However, two consecutive quarterly declines in GDP usually mean a recession is underway.
So why does this make me more enthusiastic about stocks in the short term? A recession could mean there is good news for investors. The stock market often begins to recover long before a recession ends. And in the 12 months following a recession, the market generated positive returns 91 percent of the time, since 1953, according to an analysis by Darrow Wealth Management.
2. Strikingly positive quarterly updates from leaders
Another reason for my change in perspective comes from recent news from several giant companies. Just three stocks account for almost 17% of the S&P 500: apple (AAPL -0.14%), Microsoft (MSFT -0.26%)i Amazon (AMZN -1.24%). And all three provided positive quarterly updates.
Apple beat the consensus earnings estimate in its latest results. Most importantly, however, the company’s management was also optimistic about the future. Apple is looking to accelerate growth next quarter. CEO Tim Cook also said the company doesn’t see “obvious evidence of macroeconomic impact” on iPhone demand.
Microsoft missed Wall Street expectations on both the top and bottom lines. Still, the stock jumped after its quarterly update in July because Microsoft projected double-digit growth for revenue and operating income next fiscal year.
Meanwhile, Amazon delivered stellar second-quarter results. The company’s digital advertising business continues to grow. Its Amazon Web Services cloud unit remains a big winner. There were also signs that the overcapacity issues plaguing the e-commerce segment are improving.
For the most part, as the leaders go, so goes the broader market. When Apple, Microsoft, and Amazon please investors, there’s usually good reason to be optimistic about the global stock market.
3. Positive signs that inflation could be abating
Last but not least, there are some positive signs that inflation may be easing. No, the inflation rate has not gone down yet. But I wouldn’t be surprised if it does in the near future.
The most visible indication that inflation may have already peaked is the decline in gas prices. After hitting record highs earlier this year, gas prices have fallen over the past seven weeks. Much of the increase in other product prices was due to higher transportation costs.
The housing market also appears to be cooling. Sales of new and existing homes have declined. Mortgage applications have fallen to their lowest level in more than two decades.
If these trends in gas and housing continue, the inflation rate will surely fall as well. If that happens, the Federal Reserve should not continue to raise interest rates. In this scenario, investors would have much more confidence in the economy and the short-term prospects of companies.
Cautious optimism
I am by no means proclaiming that another bull market is imminent. Shares may fall further before starting a sustained rebound. Big companies could get much worse results next quarter. Inflation could remain a serious problem, especially if gas prices rise again.
However, I am cautiously optimistic about the near-term outlook for stocks for the first time in months. Even better, I’m unabashedly optimistic about the long-term outlook for top-tier stocks.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon, Apple and Microsoft. The Motley Fool has positions and recommends Amazon, Apple and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 Apple calls and short March 2023 $130 Apple calls. The Motley Fool has a disclosure policy.
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