There’s always a tug-of-war between the bulls and bears, but the contest in recent months has been more intense than usual.

The bulls point to better-than-expected first quarter earnings results, an unemployment rate of 3.4% (the lowest rate since 1969), and the strong odds of a Federal Reserve “pause” in June.

The bears argue that Wall Street has been overly optimistic in its pricing of interest rate cuts. They also remind us of the persistent banking crisis, the lagging economic damage of 10 consecutive rate hikes, and the bitter impasse in Congress over the debt ceiling.

It’s possible that the stock market will continue to move sideways and remain stuck in the 3,800-4,200 range into the foreseeable future. In that regard, I’m reminded of a fictional creature in Dr Doolittle’s animal menagerie: the Pushmi-Pullyu, which has two heads at opposite ends of its body.

Let’s examine the competing forces that are pulling at the market, for clues as to whether a breakout awaits stocks over the near term.

Read This Story: Is The Fed Finally Done Raising Rates?

For Q1 2023, the blended year-over-year earnings decline for the S&P 500 is -2.2%. If that number turns out to be the actual decline for the quarter, it will mark the second straight quarter that the index has reported a decline in earnings.

However, earnings prospects have markedly improved. On March 31, the projected decline was -6.7%. We’ve gotten important surprises on the upside in recent days, especially from mega-cap leaders such as Apple (NSDQ: AAPL). For Q1 2023, S&P 500 companies are recording their best performance relative to analyst expectations since Q4 2021.

As of this writing, more than 85% of the companies in the S&P 500 have reported actual results for the quarter. Among these companies, 79% have reported actual earnings above estimates, which is above the five-year average of 77% and above the 10-year average of 73%. As a whole, companies are reporting earnings that are 7.0% above expectations.

Conditions appear favorable for the latter part of this year. The Fed is widely expected to pause its interest rate tightening cycle at its next meeting in June. In addition, earnings growth is on track to enter positive territory. For Q3 2023 and Q4 2023, analysts are projecting earnings growth of 1.2% and 8.5%, respectively. For all of calendar year 2023, analysts predict earnings growth of 1.2%.

A favorable technical trend has been the recent decline of the CBOE Volatility Index (VIX), also known as the “fear index” (see chart).

The Chicago Board Options Exchange created the VIX as a gauge of “implied volatility” in the market. It’s based on the amount of trading in near-term put and call options on the S&P 500 index.

The VIX rises when demand for put options outweighs demand for calls. Put options increase in value when the S&P 500 declines in value. The VIX falls when demand for call options outstrips demand for puts. Call options increase in value when the index goes higher.

When the VIX surpasses 20, you can expect greater than normal volatility over the next 30 days, and vice versa. As the above chart shows, the VIX has pulled back below the significant threshold of 20, to hover at about 17. That’s a positive sign; a lower VIX means less fear and stress in the market.

It’s also positive that the S&P 500 index, and the New York Stock Exchange advance/decline line, are both hovering above their 200-day moving averages.

That said, the main U.S. stock market indices closed lower Tuesday as follows:

• DJIA: -0.17%
• S&P 500: -0.46%
• NASDAQ: -0.63%
• Russell 2000: -0.27%

Investors are worried about banking turmoil and the debt ceiling battle in Congress. As a U.S. debt default looms, President Biden and House Leader Kevin McCarthy (R-CA) met in the Oval Office on Tuesday, in an attempt to hammer out a compromise. Not surprisingly, both sides dug in their heels. If Uncle Sam defaults, the stock market would crater.

Investors also await key market-moving data this week, notably the consumer price index on Wednesday and the producer price index on Thursday. If inflation shows further cooling, which is likely the case, the bulls get a win. But if the U.S. defaults on its debt, the bears get an even bigger win. Stay tuned.

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John Persinos is the editorial director of Investing Daily.

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