By Alex Financials

The stock market is experiencing a wave of optimism, with expectations of a 4% gain in June following a 5% increase in May. According to Fundstrat’s Tom Lee, several factors are contributing to this positive outlook, including historical bullish seasonals, continued disinflation, low investor leverage, substantial cash reserves, and robust corporate earnings​​.

Historical Bullish Seasonals

Historically, the stock market tends to perform well in June following a strong first quarter and a decline in April. This pattern has been observed since 1927, and this year appears to be no different. The win ratio for stocks rising in June stands at 100%, with a median gain of 3.9%, potentially pushing the S&P 500 (SPX) to new highs​​.

Continued Disinflation

Inflation trends are another key factor. Favorable inflation data points, including declining used car prices and increasing new car inventories, suggest that inflation could continue to decrease. This would increase the likelihood of the Federal Reserve cutting interest rates in the latter half of the year, providing a further boost to the market​​.

Low Investor Leverage and High Cash Reserves

Current investor behavior indicates low leverage, with NYSE margin debt significantly below its 2021 peak. Additionally, there is a record $6 trillion in cash on the sidelines. This cash could flow back into the stock market, especially following strong earnings reports from companies like Nvidia (NVDA)​​.

Robust Corporate Earnings

Corporate earnings have been solid, with 97% of S&P 500 companies reporting better-than-expected results. This includes significant contributions from the “Magnificent Seven” stocks, as well as strong performances from other companies within the index​​.

Persistent Inflation Concerns

Inflation remains above the Federal Reserve’s target of 2%, with recent CPI reports showing annual rates around 3.4% to 3.5%. Fed Chair Jerome Powell has indicated that interest rates will remain high until there is consistent evidence of inflation decreasing towards the target level​​.

June Fed Meeting Projections

The Federal Reserve’s June meeting will be closely watched for its new summary of economic projections (SEP). Investors are particularly interested in the “dot plot,” which indicates individual Fed officials’ estimates for inflation and interest rates. The March dot plot suggested potential rate cuts by the end of 2024, but persistent inflation may alter these expectations​​.

Sector Spotlight: Consumer Staples Stocks

High inflation typically affects discretionary spending, but consumer staples stocks, which include essential goods, tend to remain resilient. Several major consumer staples companies are reporting earnings in June, providing insight into how these companies are navigating the current economic environment.

Upcoming Earnings Reports

• Dollar Tree (DLTR): Reporting on June 5, with a consensus EPS forecast of $1.43.
• Campbell Soup Company (CPB): Reporting on June 5, with a forecast of $0.70.
• J.M. Smucker (SJM): Reporting on June 6, with a forecast of $2.32.
• Casey’s General Stores (CASY): Reporting on June 11, with a forecast of $1.74.
• Walgreens Boots Alliance (WBA): Reporting on June 25, with a forecast of $0.68​​.

Consumer staples stocks are often seen as safe investments during times of economic uncertainty due to their essential nature. The upcoming earnings reports will provide further insights into their performance amid high inflation.

In summary, the stock market is poised for potential gains in June, driven by historical patterns, favorable inflation trends, low leverage, high cash reserves, and strong corporate earnings. The Federal Reserve’s upcoming decisions on interest rates and inflation projections will be critical in shaping market expectations. Meanwhile, consumer staples stocks offer a stable investment opportunity in the current economic climate.