July 5th 2023, 3:38:47 pm

(about 3 months ago)

Stocks gains may have limited upside.

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Stocks gains may have limited upside.

North American stock markets continued their bullish trend despite continued hawkishness by central banks and increasing signs of economic slowdown. S&P 500 and tech-heavy Nasdaq added 2.93% and 3.61% while Canada’s S&P/TSX Composite advanced 3.15% in the past five days. 

While Nasdaq is 32% up in the first half of 2023, analysts are warning that the rally cannot be sustainable with higher US and Canadian interest rates and the possibility of at least another hike by the end of the year. The job market is still tight and unemployment at a record low but the latest economic data including US and Canada’s Gross Domestic Product (GDP) is pointing to slow down and lower corporate earnings. 

Unless companies start to meaningfully lay off their workforce and people keep their jobs, it is hardly possible to see the effect of higher interest rates and economic recession. In simple words, the effect of economic stimulus money of the pandemic era is still lingering, and people will continue to spend money as long as they can. 

The main sources of wealth for Western societies are real estate and equities so in case people lose their jobs and fail to afford their higher mortgage payments, the economic recession is warranted. 

The tailwinds are also supportive. Apple Inc became the first listed company that passed a three trillion-dollar market capitalization. Investors still believe that many of the US companies are positioned to deliver higher earnings and bypath the higher costs of production induced by higher inflation to the customers. In that case, they will manage to remain immune to inflation effects and continue to deliver earnings and multiple expansions.