Stock Market This Week: Five Themes to Watch

Following another eventful week in the U.S. equities market, the benchmark S&P 500 closed up nearly 2% on Friday, July 15. For the week, the index moved up a hair above parity, with the aforementioned late surge helping to offset earlier negativity. Still, investors will need to brace themselves for a potentially pivotal moment on Wall Street.

As things stand now, the S&P 500 is down 19.5% on a year-to-date basis, which is essentially straddling the line of a bear market correction. Interestingly, though, the index has not yet slipped below the June 16 closing point level of 3,666.8. Over the trailing month, the S&P is up 5%, which is encouraging. However, to fully regain momentum, the bulls will be looking for greater catalysts.

To break the deadlock between the optimists and pessimists may come down to the heart of the second-quarter earnings season. Since inflation really started to pick up in May, analysts will be curious to see how publicly traded companies fared during the affected period. Combine this focus with geopolitical considerations and investors will again have plenty to chew on.

Below are five themes to watch this week.

President Biden and His Vision for the Middle East

Over the weekend, President Joe Biden spoke at a summit of Arab leaders, emphasizing that the U.S. “will not walk away” from the Middle East as he attempts to ensure international partners of working to instill stability in a historically volatile region. At the same time, Biden will also be seeking to increase worldwide production of oil to mitigate soaring energy prices.

His statements, which acknowledged the risks of a power vacuum that China, Russia or Iran could fill, comes at a particularly fraught time. Concerns in the Middle East are rising due to Iran’s nuclear ambitions, weapons programs and support for militants in the region. Recently, the White House claimed that Iran showcased its drones to Kremlin officials.

For the president, however, the Middle East summit carries significant political risks. For instance, just the greeting between Biden and Saudi Crown Prince Mohammed bin Salman attracted both heavy scrutiny and criticism. As well, asking foreign countries to revitalize oil capacities while arguably stymieing domestic oil production is an awkward optic, to say the least.

Climate Plan in Tatters

Late last year, Democratic Sen. Joe Manchin stated that he could not support a $2 trillion social safety net bill – known commonly as the Build Back Better Act – dealing a massive blow to President Biden’s signature legislation. However, Democrats refused to give in, with several high-profile leaders engaging in months of negotiations to salvage certain components of the proposal.

Late last week, Manchin again put the brakes on the talks, which mainly centered on initiatives to fund clean energy infrastructures in a bid to address climate change. Naturally, many Democrats seethed at the lost opportunity. Manchin has incredible power as the Senate is split 50-50, meaning that every vote counts.

However, the senator’s rejection also speaks to economic realities. Representing West Virginia, Manchin is particularly concerned about his state’s dependency on fossil fuels. In the final days of negotiation, Manchin worked to include approval for offshore oil and gas leasing projects for his state.

Moving forward, it’s likely that policymakers must balance clean energy ambitions with the economic realities of everyday American households.

Auto Repossessions Soaring

According to a recent CBS News report, auto repossessions are surging across the country, leading many experts to worry that it could cause an implosion within the used-car industry. Repossessions occur when borrowers fall behind on their payments, forcing lenders to seize the vehicles in question.

Invariably, such incidents impact households of lower means or people with less-stable occupations. However, what has sparked significant concerns is that repossessions have spiked – and in some cases even doubled – among prime borrowers or people with good to excellent credit scores. Since these individuals are less likely to default on their financial obligations, it raises alarms for other areas of the consumer economy.

Mainly, the biggest concern likely focuses on the real estate market. Essentially, if prime borrowers are having difficulty keeping up with their car payments, the influx of new homebuyers presents significant viability concerns. Add in the fact that reports about increasing layoffs across multiple industries are escalating and investors may soon see fissures develop in the housing arena.

Crypto Utility Called into Question

Ask any cryptocurrency advocate and you’ll likely hear strong assertions that decentralized blockchain protocols can either outright replace or run parallel and compete with international fiat currencies and monetary systems. Whatever the case may be, the reality as things stand right now is that cryptos consume a considerable amount of energy.

Therefore, it’s interesting that The Washington Post recently reported that limiting crypto-mining operations helped the Texas power grid battle an intense heat wave. The Electric Reliability Council of Texas asked businesses and residents to voluntarily conserve energy, resulting in nearly all industrial-scale mining in the Lone Star State to power down.

Perhaps miners would have been less reluctant to cooperate if cryptos were still running sky high. Nevertheless, the broader issue focuses on utility. At some point, a debate will likely rise regarding the utilitarian need for cryptos versus the energy required to “create” them.

The practical applications of blockchain-derived coins and tokens (relative to centralized solutions) remains to be seen. However, the cost to energy consumption is real.

Earnings in Focus

After a few weeks of slow earnings disclosures, the market heats up again for this week, starting right from the get-go. Financial and investment giants Bank of America (BAC), Charles Schwab (SCHW) and Goldman Sachs (GS) all report on Monday. Undoubtedly, analysts will key in on these reports, looking for important clues regarding economic trajectory. As well, many will be curious if rising interest rates helped lift profitability for lending programs or if clients simply walked away from the spiked borrowing costs.

Another name to keep on the watchlist (literally) is Netflix (NFLX), which releases on Tuesday. After suffering its first subscriber loss in over a decade in Q1 of this year, analysts will be very curious about what the performance was like in Q2. For NFLX stock, it could be a make-it-or-break-it moment as the underlying company is in desperate need to prove it has what it takes to compete in an increasingly saturated market.

Finally, investors will want to take a look at American Airlines (AAL), which releases its financial results on Thursday. The COVID-19 pandemic has disproportionately affected the air travel industry. However, the concept of revenge travel – or pent-up demand after two years of lockdowns and mitigation protocols – may provide the saving grace for AAL stock and its ilk.

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