Quick Bites | Bull markets climb walls of doubt (part 1)

Could this be the most-hated bull market ever? Even as the S&P 500 climbed more than 20% since the October 2022 low, doubts and scepticism have accompanied the rise. And of course, that is as it should be – nothing in markets should be taken for granted. A surge in bond market yields brought that home over the last couple of weeks. So let’s have a quick look at some of the key issues that continue to eat away at investor confidence.

Five key issues that keep many on the sidelines:

  1. Earnings season could reveal nasty surprises.
  2. The yield curve inversion is deepening.
  3. Global markets are skittish, especially China.
  4. Higher for longer rates are doing damage.
  5. US stock valuations are expensive.

Due to space constraints, we’ll limit discussion of each point to only a very broad general comment without delving any deeper – in truth, each of these issues demands in depth analysis on their own. But Quick Bites are meant to be quick, so here goes…

1. Earnings season could reveal nasty surprises

Source: FactSet, WSJ 


Earnings season in the US kicks off in the second week of July. Companies in the S&P 500 are expected to report a 7.2% decline in earnings for the second quarter, marking what would be the third consecutive year-over-year earnings decline.

Investors are on the lookout for whether corporate pricing power is ebbing. The net profit margin of companies in the S&P 500 is expected to fall to 11.4%, notably lower than the 13% peak reached in 2021. Companies might find themselves squeezed at both ends as they face rising financing costs while also struggling to raise prices further as inflation recedes. Revenues will be especially vulnerable to fickle consumer confidence levels. If earnings disappoint in a significant way, expensively priced markets will likely struggle.

2. The yield curve is deepening 

Source: Federal Reserve of St Louis, WSJ 


About a year ago, the US bond market began flashing a recession signal: yield curve inversion, when the yield on the 10 year US Treasury trades below the 2 year Treasury. Recently, the yield on the 10 year note traded more than 1% below that of the 2 year yield – the widest negative gap since 1981.

Investors look to the US Treasury yield curve as a gauge of economic health. The normal shape of the yield curve is gently rising from left to right, indicating higher yields available over longer periods. When the curve inverts, it tends to mean that bond traders are betting the Fed will keep rates high in the near term to fight inflation, possibly causing a recession – but will then need to cut them later to resuscitate the economy.

We’ll continue with key issues 3, 4 and 5 in tomorrow’s Quick Bite (i.e. part 2).



Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770.  The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.