The week of Independence Day is one of our favorite times of year.  It allows us to reflect upon our history and to remember our many blessings and freedoms.

The week is also normally a quiet time in the markets with lower volumes and less activity, making it an ideal time to “get away” and recharge.  Therefore, we are spending time at the beach this week.  

Lately, it seems there are numerous reports of tragic shark attacks.  Although it seems the scientific community is divided over shark activity, and even if statistically rare, we certainly find ourselves looking for potential harm - above and below the surface, perhaps more than ever.  Interestingly, from afar, we’ve learned it is hard to distinguish between dolphins and sharks.  At least to the untrained eye.  And yet when it comes to swimming in the open waters, it seems prudent to be aware of potential dangers lurking nearby that could be harmful.

The same is true regarding investing.  There are many moving parts.  Similar to identifying a shark or a dolphin, at times it can be difficult distinguishing between issues that might cause harm or benefit to one’s portfolio.

There are signs that things are beginning to slow in the economy.  This can be seen in various reports from ISM data - both manufacturing and services, employment stats and revisions, consumer confidence levels, housing data, and the latest GDPNow estimate from the Atlanta Fed.  Although too early to call a recession, or frankly even a looming recession, it seems the Fed’s fight against inflation, by slowing the growth of the economy, is showing signs of working.

All things being equal, a growing economy serves as a favorable backdrop to improving corporate earnings.  Corporate earnings are strong and are forecast to grow even higher.  With early signs of a slowing economy, what is the disconnect?  Perhaps corporate profit growth is due to continued fiscal and monetary policy that has resulted in a much higher money supply - more money sloshing around in the system needing to be deployed.  Perhaps the rally is partially due to the belief the Fed will soon begin to cut rates.  Perhaps the allure of advancing technology - especially artificial intelligence - promises higher levels of productivity and efficiency, eventually resulting in higher earnings.  

Corporate earnings are forecast to grow at a stronger rate this year than the average, and an even higher level in 2025.  It is those earnings, and the multiple which investors are willing to pay for earnings that determine stock price and valuation.  Whatever the root cause of higher earnings, and a strong outlook, so far, things are looking promising.  

Putting the numerous moving parts together - yes, there are weakening trends in the economy.  However, corporate earnings are growing at a much faster rate than longer term averages. Yes, the market is a bit high, but so is the increase in earnings.  And, yes the rally has been narrowly concentrated.  But so has earnings growth.  A broad-based rally is believed to be a healthier rally.  Should this materialize, there are likely even better times ahead.  History tells us after a strong first half of the year, the second half is normally strong, as well. 

As we pause to celebrate our independence and all the blessings for which we are so thankful, we are reminded of those who sacrificed greatly for all of us to enjoy our freedoms.  We are forever grateful. 

Whether this finds you at the mountains, beach, lake, ranch, or at home with family and friends, we hope this time is special and meaningful as we celebrate the land of the free and the home of the brave.