Over the past week, the S&P 500 (SPY) mostly moved sideways before breaking out today on strong volume and price action. It’s too soon to know whether this is the start of a new uptrend or simply just another bounce. However, we are entering a seasonally bullish time of the year and early indications are that Q3 earnings season is going to be strong as well which could be another tailwind for stocks. In this week’s commentary, I will cover this topic and our market outlook.

As of the end of trading the last week, the S&P 500 is up by 0.8% with the Russell 2000 (IWM) up 1.3%. It’s certainly been more of a rotation-type environment rather than a trending market where all boats are lifted higher.

Ultimately, these types of advances are more sustainable and can last longer. The S&P 500 is up by 20% this year, yet it’s never gotten too extremely overbought other than in mid-February, where it was punished with a steep decline.

If we look at the market from a bottom-up perspective, we can see many individual stocks that are lower by 20 to 40%.

Thus, in my opinion, the market is pulling off a delicate task – the market environment is bullish with low rates and earnings growth but it’s overbought in terms of a more than 100% YTD gain.

The market is managing this contradiction by moving higher in fits and starts but with rolling corrections under the market surface.

Now, let’s look at this earnings season.

We’ve had 2 historic earnings seasons in terms of growth and performance relative to expectations. It was expected that this would moderate in Q3 but it’s not really the case so far.

Based on early results, earnings growth forecasts for the quarter have increased to 28% from 24%. Equally important, we are not seeing much erosion in terms of margins even though companies are complaining about rising costs, difficulty of hiring workers, and supply chain challenges on the conference call.

However, investors should continue to focus on this matter. But, there is a chance that we have peaked in terms of this issue as dropping coronavirus case counts should lead to improvements in the situation of ports being backed up.

A strong earnings season could be the catalyst for the market to trend higher. It’s also an opportunity for us to ensure that the companies in our portfolio are executing relative to our expectations.