In the words of the classic blues song:

I went down to the crossroads
Fell down on my knees…

Wall Street right now stands before two divergent paths. Does the rally continue…or as happened in 2022, will investors fall down on their knees?

The stock market has embarked on a powerful upward trajectory year to date, with most asset classes participating. The laggards of last year, notably technology and small-cap stocks, have become the leaders.

But last week, the rally lost steam. The S&P 500 fell 1.1%, its worst week so far of 2023. Treasury yields moved higher, as did crude oil prices.

Russia, which needs oil revenue to feed its war machine, announced on February 10 that it would cut oil output by 500,000 barrels per day in March. That helps Russian President Vladimir Putin’s fight against Ukraine, but hurts Federal Reserve Chair Jerome Powell’s fight against inflation.

After a bout of euphoria in January, Wall Street’s fears have returned concerning corporate earnings, the rate of inflation, the Fed’s intentions, and the state of the global economy.

However, as I explain below, the rest of the year looks encouraging for equities, albeit with familiar perils along the way.

This week’s momentous tests…

U.S. jobs growth has been strong…for the Fed’s purposes, perhaps too strong. The government recently reported that the economy added 517,000 jobs in January, for an average monthly gain of 356,000 over the past three months. The number of jobs added in January far exceeded consensus expectations.

The resilient labor market has kept the overall economy on its feet, but it makes the Fed’s efforts to curb inflation more difficult. We’re at an inflection point: will higher interest rates tip the economy into a recession, or will we enjoy a so-called soft landing?

A big test will come Tuesday, when the consumer price index (CPI) for January is released. Headline CPI inflation in the U.S. has fallen for six straight months; it’s projected to continue falling. However, if the next CPI report comes in hotter than expected, the market’s downward trend of recent days is likely to accelerate.

Another momentous data print is scheduled to occur Thursday, with release of the producer price index (PPI) for January. The PPI also is expected to continue reflecting a decline. Because it measures wholesales prices, the PPI is considered a leading indicator on inflation.

Read This Story: Short-Term Pullback or Bear Market Rally?

The betting on Wall Street is for headline CPI inflation to decline to under 4.0% by the end of 2023, which would take pressure off the Fed.

But for now, a multitude of worries that bedeviled investors in 2022 are resurfacing to weigh on stocks (see the following table).

Among the worst worries is decelerating corporate earnings growth. For the stock market, earnings growth is where the rubber hits the road. And that road is getting bumpy.

For fourth-quarter 2022, the blended earnings decline for the S&P 500 is -4.9%, according to data from research firm FactSet (as of market close February 10). If -4.9% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decline in earnings since Q3 2020 (-5.7%).

One silver lining is that downward revisions for Q4 earnings seem to be bottoming, just as inflation falls closer to 2.0%. The confluence of these two trends bodes well for the stock market in the coming months.

The main U.S stock market indices started the new week on an upbeat note, as investors awaited inflation data that they expect to be encouraging. The indices closed higher on Monday as follows:

• DJIA: +1.14%
• S&P 500: +1.11%
• NASDAQ: +1.48%
• Russell 2000: +1.16%

Indeed, you should view bouts of volatility as buying opportunities. Market dips put quality stocks on the bargain shelf. That’s especially true of the tech giants that are making long-term investments in artificial intelligence, machine learning, 5G wireless, the cloud, electric vehicles (EVs), and the Internet of Things. The shares of these Silicon Valley innovators are now available at better prices.

Society-changing technology is gaining traction. Consider the burgeoning market for EVs. The average price of an EV this year is projected to continue falling until it approximates that of a conventional gasoline-powered car. Case in point: With a starting list price of $43,500, before government incentives, a Model 3 Tesla currently costs $300 less than the least expensive BMW 3 Series sedan.

This EV boom is propelled in large part by the Inflation Reduction Act, legislation passed by Congress last year that provides tax credits of up to $7,500 for EV buyers.

The EV megatrend seems impervious to headwinds…even to the histrionic antics of Tesla (NSDQ: TSLA) CEO Elon Musk.

Betting on tech’s rebound…

When we’ve put inflation and rate hikes behind us, certain innovative companies will explode on the upside. Which brings me to my colleague Dr. Joe Duarte.

Dr. Duarte has been a professional investor and independent analyst since 1990. He is a former registered investment advisor and author of the bestselling Options Trading for Dummies, and several other books including Market Timing for Dummies and Successful Biotech Investing.

Dr. Duarte is the chief investment strategist of our premium trading services, Profit Catalyst Alert and Weekly Cash Machine. He’s also a practicing physician with a thriving medical practice. Think of him as your “investment doctor.”

In a new report, Dr. Duarte pinpoints a groundbreaking tech disruption worth $75 trillion…and it all starts with one under-the-radar $3 stock.

This investment opportunity in the tech sector is poised for market-crushing gains in 2023. Learn more by clicking here.

John Persinos is the editorial director of Investing Daily.

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