Unknown Unknowns: Investors Confront a Confusing Environment

Many traders are unsure of what they ought to anticipate and understand when it comes to supporting risky products. They are unsure whether to pay heed to economic data weakness and deterioration, poor profits, recessionary concerns, aggressive Fed monetary policy, or, most importantly, the prospect of another big financial catastrophe. For them, the unknown exists, and there is a big disconnect between the U.S. equities market and what statistics and economic fundamentals imply.

Let's start by looking at the current earnings season in the United States. So far, U.S. corporations that have reported profits have done better than many expected. This is true when we look at the U.S. banks that have reported as well as tech behemoths like Microsoft, Amazon, Intel, and others. There has been so much dread and concern among traders and investors heading into this earnings season that it would be a total catastrophe owing to the downturn in economic growth.

So far, we have seen that banks have delivered not-so-bad results; in fact, their trading income has remained consistent. They are slightly gloomy about the future, but they are certain that they have enough cash to deal with the unknown. On the other hand, the earnings of First Republic Bank suggested that depositors are concerned about keeping their money at U.S. regional banks.

Nonetheless, the big tech titans aided in restoring investor confidence this week by providing a plethora of reasons why traders should favor riskier assets. For example, Amazon's profits, which are extremely susceptible to consumer spending and economic development, were much higher than predicted. Similarly, Meta stated in its report that its advertising income has returned and that the company's recent layoffs have aided its top-line profitability metrics. All of this contributed to the Dow Jones Industrial Average posting its greatest one-day percentage rise since January.

However, there are some investors who remain concerned and perplexed when they begin to look beyond earnings and focus on fundamentals, which pose a significant threat to everything and the unknown. They are concerned about the stickiness of U.S. inflation statistics and the Fed's choices. Speculators, on the other hand, say there is little cause for concern. This is due to their belief that any negative news is good news for the U.S. stock market. They believe that any worsening in the U.S. equities market or economic conditions would only increase regulators' and the Fed's support.

For example, the U.S. printed a dismal GDP result yesterday, one that was significantly less than expected (actual increase q/q GDP: 1.1%, forecast: 2.0%), and stock indices posted strong gains. Traders that are hopeful that a dismal scenario will compel the Fed to stop raising interest rates or even begin to anticipate decreasing them.

It is not as easy as that. To begin with, the Fed is under immense pressure to do more to reduce inflation owing to its intransigence. This implies that, in actuality, the Fed is likely to raise interest rates at least twice more this year, for a total interest rate rise of 50 basis points.

Despite what some may believe, bad news is not good news because the current economic data will likely worsen. The U.S. labor market, which is now strong, is expected to endure instability as corporate activity weakens, further lowering consumer morale. Above all, any additional potential increase in interest rates will provide more tailwinds to the banking system. In short, we're still in a cycle of uncertainty, and it looks to continue for some time.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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