The Market Is Running on ‘Hopium’

The S&P 500 Index is quietly moving higher once again…

On October 12, the broad market index closed at about 3,577. That was its lowest point since late 2020. But in the two-plus weeks since then, it’s up roughly 9%.

Unfortunately for investors… not much has changed at the macro level.

Russia is still at war with Ukraine. China is still adamant that it owns Taiwan. And North Korea is still testing its missiles. And on an economic front, inflation is still high.

Here in the U.S., that last point means more Federal Reserve interest-rate hikes are likely…

CME Group’s FedWatch Tool currently projects a nearly 90% chance that the central bank will raise its benchmark rate 75 basis points at this week’s meeting.

At the same time, consumer confidence in the U.S. is falling. The latest data from the Conference Board showed that this metric just hit its lowest level in three months.

So if nothing has changed… why is the stock market up roughly 9% recently?

Chaikin Analytics founder Marc Chaikin got straight to the point when I caught up with him last week. As he explained to me…

Investors have an addiction to “hopium.” And in turn, so does the market.

In short, investors are getting sick of selling. They’re tired of bad news. They’re searching for any form of hope they can get.

Enter earnings season…

The latest earnings season kicked off with a bang earlier this month.

The big banks reported first. And in general, their earnings weren’t bad. In fact, as of last Monday, 65% of financial companies that reported earnings beat their earnings estimates.

The trend was similar across several market sectors. Many companies beat expectations.

As my dad likes to say… “New information calls for new decisions.”

Investors really took this saying to heart over the past two-plus weeks. Earnings season is when the newest information comes to light for the most companies…

Four times a year, companies report what happened over the previous three months. Plus, they issue guidance on what they expect to happen over the next three months (or more).

No other time of year comes with as much information as earnings season.

But here’s the thing…

As of last Monday, only 20% of S&P 500 companies had reported earnings in this cycle. Another 33% reported last week. And look where hopium is leading us now

On Wednesday, Meta Platforms (META) reported a major miss. And as a result, its stock fell nearly 25% on Thursday… in one day. The stock is now down a staggering 71% this year.

Then, Amazon (AMZN) reported earnings after the markets closed on Thursday. And its report spooked investors, too. The company’s stock fell around 7% on Friday.

With just those two companies, that’s about $158 billion in market value gone in two days.

To put it simply, it’s going to take a lot more than hope to turn around wipeouts like that. The major macro headwinds will need to subside.

But today, those headwinds are still roaring.

So as the market comes down off its “hopium” high, we’ll likely see significant volatility in the next couple of weeks. Be prepared to weather the next leg of this market storm.

Good investing,

Karina Kovalcik

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