What to buy when the stock market shifts into another gear?

It’s an acknowledgment that the easy money has been made long ago in the post-pandemic bull run, and that markets and the economy are entering more uncertain midcycle times. That has pushed quality stocks back into favor, while some of the biggest winners of recent quarters have been thrown to the curb. Economically sensitive

S&P 500

For example, energy stocks have fallen in correction territory since June, as has Cathie Woods speculative-growth-heavy

ARK Innovation

listed fund (ticker: ARKK). Market size has shrunk as a smaller group of winners, such as the Big Tech stars, kept the indices high.

Concerning the

Dow Jones Industrial Average

over the past week, the index fell 182.31 points, or 0.52%, to 34,687.85. The S&P 500 fell 0.97% to 4327.16 and the

Nasdaq composite

lost 1.87% to 14,427.24. Each still finished within a few percentage points of their record high. Treasury yields rose and then fell, with 10-year bond yields rising above 1.4% following the release of the latest hot inflation data on Tuesday, then falling back to 1.3% each week lower finish than he started. The curve flattened as shorter interest rates held.

The dynamics suggest a summer lull after an eventful year as the market, policy and economy move into their next phases.

The second quarter earnings season should bolster that story. According to data from Yardeni Research, the S&P 500’s earnings per share are expected to rise 62% from a year ago. That’s gangbuster’s growth. But investors know it’s coming. Stocks have surged to their record highs and rich multiples this year in anticipation of a post-pandemic rebound now showing in the numbers. It follows EPS growth of 48% in the first quarter and expectations jumps of 23% and 17% in the third and fourth quarters. In other words, the maximum profit growth is here.

As a result, the market is facing a tough hurdle this earnings season: the combination of consistently high prices and very high expectations. Stocks are penalized if they disappoint and not rewarded if they simply live up to expectations. Major banks and other financial institutions took off last week, surpassing earnings estimates overall by about 26%. But their shares were sold almost everywhere:

Goldman Sachs Group

(GS), JPMorgan Chase (JPM), and

bank of America

(BAC) beat forecasts and fell immediately after.

The coming weeks should bring many negative reactions to great but projected gains, as well as management commentary about the margin-challenging impact of inflation in the coming quarter.

The first official estimate of US GDP for the second quarter is expected at the end of July. As with earnings, growth is predicted to be a blockbuster but the pinnacle for this economic cycle. The consensus among economists favors a seasonally adjusted annualized growth rate of 9.5% in the April-June period, after a pace of 6.4% in the first quarter. After China, which reported a slowing GDP growth rate last week, US economic growth could cool in the second half. Still big growth, but less big.

Meanwhile, inflation and the Federal Reserve’s next move remain a source of uncertainty. Inflation has risen significantly and is likely to remain high in the coming months before it moderates, Fed Chair Jerome Powell confidently told Congress last week. He reiterated that central banks are optimistic about inflation as a temporary side effect of the ongoing economic reopening.

Nevertheless, a 5.4% year-on-year increase in the June consumer price index raised some eyebrows last week. A majority of the price increases came from new and used cars, out-of-town lodging and airfare that can reasonably be expected to decline as the reopening expands on its own. But wages and primary housing costs also rose, which are seen as more persistent forms of inflation.

The bad news is we’re still not out of the woods because [inflation measures] are likely to remain high through the end of the year and into early 2022, BofA Securities economists wrote this past week. The good news is that we are likely to be near the peak, at least for the coming months, as base effects are less favorable and scarcity pressures shift from goods to services.

The focus on phasing out bond purchases and rate hikes will only become more pronounced in the coming months. The next meeting of the Feds rate-setting committees is July 27-28, followed by the annual Jackson Hole, Wyo., policy symposium a month later and another FOMC meeting three weeks after that. One will almost certainly serve as a forum for the unveiling of the Fed’s descending timeline, which could begin in late 2021 or early 2022.

All things considered, the most attractive stocks in the coming months should be those of companies that can shape their own destiny without relying on the tailwinds of the rapid recovery from the pandemic and the negative effects of hot inflation and shifting monetary policy. .

This is about quality, predictability and security, says Robert Phipps, director at Per Stirling Capital Management. The coming months will really reward those dull and boring stocks at the expense of almost everything else in the market.

Phipps Points To Big Tech Stocks Like

Apple

(AAPL),

Alphabet

(GOOGL), and

facebook

(FB) as beneficiaries of such an environment. They are proven long-term growers with steep profit margins. Each is less dependent on economic background than cyclical stocks and cheaper relative valuations than many other buzzing software stocks.

Read more trader: Fastenals results show industrial rebound and rising inflationary pressures

Alphabet also creates a screen of quality companies with defensive traits and stronger-than-average earnings trends managed by

Morgan Stanley

strategists of the past week.

Costco Wholesale

(COST),

Altria Group

(MO),

CVS health

(CFS), and

Amgen

(AMGN) also make the list.

The US economy is not on the brink of recession and earnings growth in the third quarter will still be strong. But it’s the trend that matters, and investors are never satisfied with what they have. There’s no harm in sticking to quality while the market figures out what comes next.

Write to Nicholas Jasinski at [email protected]