For a brief moment, it appeared as if the summer months would live up to their reputation for disrupting stock markets.

But after tumbling over 1,000 points in three days, the Dow Jones Industrial Average erased its losses just as quickly this past week.

And the roller-coaster ride isn’t over just yet.

It turns out that this is a pivotal week. We have three crucial events that will determine if more record highs are in store, or if the stock market will finally experience a pullback.

Here’s your guide to navigating the volatility…

Federal Reserve

The Federal Reserve faces a conundrum as it meets this week.

Transitory or not, inflation has run hot recently and that’s putting pressure on the Fed to rein in stimulus programs.

But despite hot inflation reports, government bond yields have plunged. Yields on the 10-year Treasury have fallen back to 1.23% after hitting 1.74% in March.

Now, there’s a lot of debate about what’s going on here with interest rates. But in the scary scenario, falling yields reflect a poor growth outlook.

Sluggish growth coupled with inflation means the dreaded “s” word: stagflation.

That’s why the stakes are so high this week. Investors are on edge over how Fed officials will account for these conflicting views, and if it changes their timeline on removing stimulus. A statement on their meeting releases at 2 p.m. today.

Infrastructure Bill

A $1.2 trillion bipartisan deal on an infrastructure bill looked within grasp last week. But lawmakers continue to struggle with the details, which is putting its passage into jeopardy.

It’s unclear whether Democrats will have enough votes to pass a separate $3.5 trillion follow-up bill through a process that requires a simple majority.

That’s because Senator Joe Manchin proclaimed that if the bipartisan bill falls apart, then “everything could fall apart.”

At a combined $4.7 trillion, that’s about 22% of gross domestic product. That makes infrastructure spending a major wild card in the growth outlook for the economy.

Earnings Outlook

This is shaping up to be quite the week for earnings reports. Over a third of S&P 500 members report this week, including the five largest companies ranked by market capitalization.

You will undoubtedly read about how most of these corporations beat analyst profit estimates for the most recent quarter. After all, 89% are beating estimates up to this point.

But here’s the thing: It doesn’t matter.

What matters is what CEOs say about their business prospects and how that financial outlook gets reflected in analyst profit estimates.

That’s critical going into next year, because earnings growth projections for 2022 have been falling throughout this year. As shown in the chart below, profit growth projections for 2022 started the year at 15% and have now fallen to 10%.

2022 earnings growth estimate chart

(Click here to view larger image.)

The stakes are so high because valuations are stretched, meaning earnings growth is the best path to sustaining further stock market gains.

So, stay on your toes this week!

On its own, any one of these three catalysts could be a major market event. But the fact that they fall in the same week means that you should prepare your portfolio for more volatility ahead.

And don’t forget, we’re here to help. Check out Bauman Daily’s most recent Your Money Matters video for tips and exchange-traded funds to ride out the storm.

Best regards,

Clint Lee
Research Analyst, The Bauman Letter