As inflation remains elevated, the bull narrative hinges significantly on corporate performance.

S&P 500 corporate earnings are poised for approximately 10% year-over-year growth for the first quarter, a factor that’s bolstering market confidence. This solid earnings growth is shoring up equities.

While the latest economic indicators hint at a softening of economic growth and labor market activity, this measured deceleration is likely to tame inflationary pressures towards the Federal Reserve’s 2% inflation target.

All eyes now turn toward the April consumer price index (CPI), scheduled for release this Wednesday, which is expected to show a slight decline. April’s producer price index (PPI), slated for Tuesday, also looms large.

Inflation should moderate in the coming months, creating elbow room for one or two interest rate cuts later in the year.

Profits to the Rescue…

Inflation and Fed policies continue to dominate market discourse. Many younger investors are unfamiliar with rising inflation and high interest rates. They’re getting a tough lesson.

While the trajectory of interest rates undoubtedly influences stock valuations, it’s crucial not to overlook corporate profitability. As an analyst, I assess both technical and fundamental indicators, but I tend to put more emphasis on the latter.

The health of corporate America serves as a compass for assessing the overall direction of the market. In that regard, the numbers are auspicious.

The main U.S. stock market indices extended their gains last week, inching closer to record highs (see chart).

This resurgence aligns with a robust earnings season that has surpassed analyst expectations by a notable margin of 8.5%.

The sectors of communication services, consumer discretionary, and technology continue to lead the charge in profit growth.

Mega-cap technology stocks, driven by artificial intelligence (AI) advancements, retain a competitive edge, though opportunities for AI application in diverse sectors should fuel broader market gains over the long haul.

Beyond earnings, the market has found solace this month in declining bond yields. Economic indicators, including cooler readings for first-quarter U.S. gross domestic product (GDP) growth, are weighing on bond yields.

Market expectations have swung back to dovish monetary policy, grounded in the premise of a manageable economic slowdown rather than inflationary growth. In turn, crude oil prices have eased below $80 per barrel, which is good news for the inflation fighters at the central bank.

OPEC+ has maintained production curbs, but the cartel has lost clout amid the increasingly regional nature of global oil output. Quota cheating by members desperate for oil revenue also is playing a role (as usual) in keeping crude prices at bay.

Conflicts in the Middle East and Eastern Europe aren’t causing as much consternation about oil supply as expected, although terrorism against Red Sea shipping is threatening oceangoing supply chains.

The Week Ahead…

Here’s a list of the key economic reports scheduled for release in the coming days that bear close scrutiny:

Producer price index (PPI), Fed Chair Jerome Powell speaks (Tuesday); CPI, retail sales, homebuilder confidence (Wednesday); initial jobless claims, housing starts, building permits, industrial production (Thursday); and U.S. leading economic indicators (Friday).

Powell’s remarks will carry great weight on market sentiment. Lately, the Fed chair has been making a verbal effort to calm markets.

In light of the investment conditions I’ve just described, I suggest recalibrating portfolios with a preference for scenarios involving lower interest rates.

Sectors benefiting from lower rates include utilities, real estate, consumer discretionary, and housing. These sectors tend to rise when rates fall and corporate earnings grow.

You should also consider cryptocurrency, an asset class that’s increasingly part of the investment mainstream.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.