Summer Stock Rally Confirms April Forecast

On April 9, I forecasted a summer stock rally on the strength of second quarter earnings.

Since that note was circulated, the S&P 500 Index is up 6.6 percent and since the first day of summer, it has risen 4.9 percent.

Skeptics pointed to a highly elevated price earnings ratio – 44 in April – as evidence that stocks were priced to perfection or simply overvalued. As I pointed out, profits, depressed by COVID, were forecasted to jump in the second quarter.

Next week, the major banks' earnings reports begin coming in and other major companies will follow. If profits rise as predicted by FactSet, the S&P 500 P/E ratio should fall to 25.5—in line with the 25-year moving average of 26.4

With prospects for a robust economic recovery continuing through the rest of the year, equities have a lot more room to rise.

With shifts in the economy and the inflationary outlook uncertain, sectors and particular companies offering the greatest potential are difficult to peg. Consequently, betting further on Big Tech or reflationary strategies offer comparable risk for volatility.

For the average retail investor, it would be best to stick with indexing.