Federal Reserve Chair Jerome Powell made an interesting comment to the House on Tuesday. In his semiannual testimony, he said, “We have a long way to go.” The Fed chief committed the central bank to do “everything we can to support the economy for as long as it takes.”

I’m sure I wasn’t the only one who was reminded of then-European Central Bank President Mario Draghi’s comments back from 2012: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Draghi was speaking during the darkest days of last decade’s euro crisis. That was the peak of the crisis. Within weeks, yields on distressed Italian and Greek government debt were falling.

Within days of his statement, European stock markets rallied.

I have no doubt Powell understands the similarity between his comments and Draghi’s. But there are important differences between conditions to consider. When Draghi made his commitment, unemployment in the eurozone was at 10%.

_{Source: Federal Reserve}

Inflation was at 0.2%. Draghi had room to maneuver, while Powell faces inflation of 5% and unemployment of 5.8%. While unemployment is well above the pre-pandemic low of 3.5%, it is near its long-term average.

Why This Earnings Season Is So Important

In the meantime, earnings season is about to start… and the results are expected to be spectacular. According to FactSet, earnings per share (EPS) is expected to grow 63% compared to the same quarter in 2020.

Now, there’s an important caveat to remember. The same quarter in 2020 was a time when the economy was almost completely shut down due to the pandemic. At that time, recovery was almost unimaginable. In the chart, I included revenue growth to show that the change in EPS is not sustainable.

Analysts understand that. They expect earnings growth to quickly slow, reverting to mean and hitting the levels seen in 2019 by the end of 2022.

For 2022, analysts expect the companies in the S&P 500 to report a combined EPS of about $210. If the index trades at 20 times earnings — an above-average price-to-earnings (P/E) ratio — the S&P 500 would be at 4,200, which is about 2% below the current level.

Of course, analysts could be wrong. And in this case, I believe they will be.

It is unlikely earnings will continue growing for the next year and a half without interruption. Inflation, even if it is constrained by the Fed, will pressure profit margins and leave consumers with less disposable income. EPS expectations are likely to follow their usual trend and decline over the next few months. The history of earnings estimates trends is shown in the next chart, produced by the experts over at Yardeni Research. Almost every year, estimates are lowered over time.

Closing Thoughts

Looking ahead, I expect the Fed to do whatever it takes, and I expect that to be inflationary. This should create volatility, and we have already seen volatility increase in recent days.

This earnings season will also be interesting, and I’ll be analyzing reports as they come in. This will tell us a lot about what we should expect from the market for the rest of this year.

In the meantime, while we wait for those earnings results, I’m keeping my focus on making high-income, low-risk trades over at Maximum Income.

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