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Investors See Bullish Signals Under the Stock Market’s Surface

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Hershey shares jumped last week.
Photo: Luke Sharrett/Bloomberg News

It’s been a rocky spell for stocks. Under the market’s surface, some investors see promising signs.

The S&P 500 has risen or fallen at least 1% in six of the past nine trading days as anxieties over the war in Ukraine, high inflation and the path of interest rates buffet the market. The benchmark U.S. stock index recently suffered its first correction, or decline of at least 10% from a recent high, since the beginning of the Covid-19 pandemic. It is now down 9.2% this year, including last week’s 1.3% fall.

Despite…

It’s been a rocky spell for stocks. Under the market’s surface, some investors see promising signs.

The S&P 500 has risen or fallen at least 1% in six of the past nine trading days as anxieties over the war in Ukraine, high inflation and the path of interest rates buffet the market. The benchmark U.S. stock index recently suffered its first correction, or decline of at least 10% from a recent high, since the beginning of the Covid-19 pandemic. It is now down 9.2% this year, including last week’s 1.3% fall.

Despite the volatility, a variety of individual stocks have broken out. Among those setting records last week were candy maker
Hershey Co.
, oil giant
Chevron Corp.
, railroad company
Union Pacific Corp.
, drug distributor
AmerisourceBergen Corp.
and conglomerate
Berkshire Hathaway Inc.

Many investors see reason for optimism when stocks from different corners of the market rally simultaneously. Such moves hint at the underpinnings of a durable advance, even when that has yet to materialize at the level of major stock indexes. That contrasts with periods in recent years when big tech stocks lifted the market while other sectors languished.

“That can’t sustain itself forever, so I think that’s been a healthy development,” said

Hank Smith,
head of investment strategy at Haverford Trust. “Even with this being another down week, what you’re seeing is there is buying power out there.”

Tech shares have pulled back this year as the Federal Reserve’s plan to raise interest rates weighs on the high value that investors assigned to those companies’ future earnings. The losses in sectors ranging from industrials to financials to healthcare have been less severe, and the energy group has shot higher.

In one sign of the outsize influence of big tech companies, the S&P 500, which is weighted by market value, is lagging behind a version of the index in which each constituent is equally weighted. The S&P 500 Equal Weight Index is down 5.9% in 2022.

Investors this week will scrutinize new inflation data ahead of the central bank meeting, which begins March 15. They also will parse earnings reports from
Campbell Soup Co.
,
Ulta Beauty Inc.
and software company
Oracle Corp.
for insights on cost pressures and customer demand.

While the recent stock-market declines might make investors cringe, some point to signs that shares are poised for a rebound. Profits among big U.S. companies are expected to grow more than 8% from 2021, and the stock market looks less expensive than it has since the early days of the pandemic in the wake of the recent selloff. The widespread selling on geopolitical news shows a rush from risk but not fundamental weakness that would weigh on stocks longer term, these investors said. 

“It doesn’t feel good right now, but it points to the potential for that breadth to improve markedly,” said

Shannon Saccocia,
chief investment officer at SVB Private Bank.

On Wednesday, for example, more than 90% of the stocks in the S&P 500 advanced after Fed Chairman

Jerome Powell
said he would propose raising interest rates by one-quarter of a percentage point this month. Some investors had feared the Fed might raise rates by half a point. Higher rates tend to pressure stock valuations by reducing investors’ risk appetite and denting the value analysts assign to companies’ future earnings.

To be sure, other technical indicators have been bleak. The market’s drawdown has been so widespread that the percentage of S&P 500 stocks trading above their 200-day moving averages recently hit its lowest level since May 2020. And in late February, the 15-day moving average of the percentage of S&P 500 stocks declining in a trading session hit one of its highest levels since March 2020, according to brokerage Instinet.

It is too soon to know just how effects of the war in Ukraine and ensuing sanctions against Russia will ripple through the global economy. The prices of commodities from wheat to corn to aluminum have hit multiyear highs, and oil has surged above $100 a barrel for the first time since 2014. Gas prices have already topped $5 a gallon in some parts of the country.

Mr. Powell said Thursday that Russia’s invasion was likely to push up inflation. He indicated the Fed wouldn’t tolerate a significant period of higher inflation, even if that meant choking off economic growth.

So far, analysts haven’t brought down their forecasts for profit growth for the year, though first-quarter estimates have edged lower. Earnings from companies in the S&P 500 are projected to climb 8.6% this year, up from forecasts for 7.2% growth on Dec. 31 and for 8.4% growth two weeks ago, according to FactSet. 

The pullback in stocks has the U.S. equity market looking its cheapest since the spring of 2020. The S&P 500 traded last week at roughly 19 times its projected earnings over the next 12 months, about where it was trading in February 2020 before stocks plummeted on concerns about how the Covid-19 pandemic would harm the economy.

“I’m looking at this year as a race between earnings growth and PE contraction,” said

Jimmy Chang,

chief investment officer at Rockefeller Global Family Office. “The question is: Who’s going to win the race?”

Conflicts like Russia’s invasion of Ukraine have historically sent stock prices lower and boosted the value of certain commodities. WSJ’s Dion Rabouin explains the investor psychology that’s moving markets. Photo: Justin Lane/EPA-EFE/Shutterstock

Write to Karen Langley at karen.langley@wsj.com

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