Earnings season proved sunny, but advisors warn of potential summer storm ahead for stocks

A stellar earnings season helped push the S&P 500 to record highs, although advisors may have to contend with a summer selloff looming on the horizon, according to Dennis Follmer, chief investment officer at Montis Financial.

“The S&P 500 is still riding a wave of euphoria from a blowout Q1 earnings season, but with earnings season over for the next couple of months, the likelihood of a summer selloff is high, as the bond market is now anticipating rate hikes and long-term interest rates recently hit the highest levels they’ve seen in nearly 20 years as inflationary expectations are moving in a dangerous direction,” he said in a note Monday. “The bond market has been sending a pretty strong signal that it sees choppier waters ahead.”

Major indexes have been ticking upwards, buoyed by strong corporate earnings from sectors such as banking and tech. The S&P 500 has climbed more than 27% in the last 12 months, while the tech-heavy Nasdaq has gained more than 42% over the same period.

Tech’s big hitters have certainly enjoyed a strong earnings season, boosted by revenue gains at Microsoft (Ticker: MSFT), Alphabet (Ticker: GOOG), Amazon (Ticker:AMZN), and Meta (Ticker: META), and standout fiscal second-quarter results at Apple (Ticker: AAPL). Set against this backdrop, Goldman Sachs recently described the recent run of U.S. corporate earnings as “remarkable” and “extraordinary.”

The Dow Jones Industrial Average has also hit record levels recently, registering new intraday and closing highs on Friday before Monday’s Memorial Day holiday lifted by hopes of a resolution to the U.S.-Iran conflictThe Dow Jones Industrial Average has also hit record levels recently, registering new intraday and closing highs on Friday before Monday’s Memorial Day holiday lifted by hopes of a resolution to the U.S.-Iran conflict.

However, the bond market is being closely watched – treasury yields have surged recently amid concerns that the Federal Reserve could raise interest rates. Last week, Charles Schwab analysts said that the central bank, now led by new Fed Chair Kevin Warsh, could favor a rate hike, not a cut. The analysts cited inflation levels that remain elevated.

However, treasury yields are retreating Tuesday amid cautious optimism about a possible ceasefire in the Middle East, despite clashes between U.S. and Iranian forces in the Strait of Hormuz. In the bond market, yields and prices move inversely.

As for the prospects for peace between the U.S. and Iran, the last few days have given us a glimpse into what it could mean for the markets, according to Thierry Wizman, Global FX & Rates Strategist at Macquarie Group. "The action since Sunday revealed what a durable 'peace' would look like for markets," he said, in a note. "Namely, crude oil prices would fall, global equities would rally, and global bond yields would decline as fears of higher and sustained long-term inflation receded."