Thursday, May 5th was quite brutal for both stocks and bonds. The Nasdaq dropped by 5% while the S&P 500 lost 3.6%. Of course, that was after Wednesday’s unexpected rally. The markets are looking for direction and for an equilibrium from where they could start a new journey. Wednesday’s rally could not be justified, even when the Fed’s chairman excluded any 75 bps increases to rates. It’s pretty concerning when earnings and corporate fundamentals need “government-related” support. It demonstrates an intoxicated unhealthy reality, so Thursday’s drop, as well as Friday’s downturn, should be perceived as a reaction to a Fed that has been losing authority and command over monetary policy.
So, what are the fundamental facts?

• The jobs report shows healthy gains (Friday’s report was better than expected). This implies an upward trend on spending, sales, and the ability to sustain if not improve profit margins.
• The forward earnings per share for the S&P 500 are growing at a healthy pace (about 6% YTD).
• The forward-looking profit margin for the S&P 500 is also a healthy 12%+.
• Valuation multiples are down. Forward P/E ratios are down, especially for growth companies that have lost at least 20% of their values (with some of them like Facebook and Netflix have lost a lot more).
• Sentiment is down because of inflationary pressures, supply-chain issues (especially ones that affect production for companies like Apple), and some missed earnings reports like Amazon.
• Indications are that the inflationary pressures are slowing down. If that is confirmed in the next 8-10 weeks, and assuming that sales trend holds up, then recession in the US should be avoided in the next 12 months. As previously conveyed though, we cannot say the same for the EU.
• Assuming the above point holds up, then multiples will rebound within a few months, if not sooner.
• External geopolitical factors are adding to the negative sentiment and that has been pushing the Bull/Bear ratio down, which if not reversed within a few weeks, could become a self-fulfilling prophecy that could lead the S&P 500 into a bear market. A cease-fire in Putin’s war in Ukraine could reverse the downtrend. Given the trouble that the Russian operations are facing along with the unprecedented economic challenges of the Russian economy, we would not be surprised if Putin tries to save face by declaring “victory” in the next few weeks. 
• If indeed we start seeing a reversal in the downturn of the multiples, then small and mid-caps (which have a forward-earnings multiple of less than 13) should enjoy significant gains.
• The hope, of course, is that the country can also achieve a cease-fire in its culture wars before devolution starts showing its ugly face.

And because we cannot be sustained by bread alone: