During bouts of volatility, we traditionally encourage clients to take their lead from earnings. If earnings are rising and recessionary risks are low then markets have the ability to grind higher. However, currently, the strength of future earnings looks uncertain despite the expectation for 5-6% growth in 2022 US GDP from the OECD.

The uncertainty stems from the current supply chain disruptions which have persisted longer than expected and have caused prices to rise. In an effort to dampen this inflation, the central bank (Fed) could be forced to take away economic stimulus in a time frame that would be faster than expected. This includes raising interest rates and curtailing their monthly bond-buying program that has served to bolster liquidity and keep yields low. With higher interest rates and less liquidity, the environment that companies would be operating in would be less attractive and therefore earnings could be less impressive. Separately, the COVID delta variant has had a negative impact on the economy and could be reflected in a more muted Q3 earnings season.

So, how will markets react to all this? It is always difficult to know whether markets will choose to focus on what’s immediately in front of it, or if they will look through to the longer term. In other words, will the markets look at the current setup with a ‘Half-Empty’ or ‘Half-Full’ lens? Below is a table that our team dynamically changes to help us visualize and weigh the current market narrative. Our current belief is that the market’s 5-7% pull back from the recent highs has been digesting the ‘Half Empty’ camp. The pullback could have been worse had it not been for the market’s acknowledgement that the ‘Half Full’ camp still exists. We are persuaded by the Half-Empty case to rebalance portfolios and right size one’s weighting to technology and the growth sectors that can be impacted negatively by higher inflation and interest rates. The Half Full case suggests cyclical sectors like resources, financials, and consumer discretionary may be appropriate sectors to rotate into. We invite readers to review the table below and to speak with their advisor about any necessary portfolio changes that take their time horizon into account.