When the first big banks reported soft numbers two weeks ago, it was literally like seeing the light at the end of the tunnel. And now it’s mathematically implausible that the light is actually an oncoming train. This season now firmly belongs to the bulls.

That’s the good news. We can all breathe the well-earned air of relief. Stocks are up almost 9% since the banks reported . . . because too many investors were hedging against complete 2008-style disaster.

No disaster means a lot of companies are cheap as ongoing concerns. Worst-case scenarios are off the table. The challenge is how far they can run from here on little more than weak numbers and relief.

Remember, we’re all but officially in a recession now. Expansion gets harder to fund. Growth rates slow down. Smart investors are already looking ahead to next quarter and beyond.

A Well-Earned Win

First, this week closed the credibility gap in a big way. Last quarter was better than we dreaded for the S&P 500 as a whole. The numbers we’ve seen so far in the cycle have raised the overall growth target from 4% to 6%.

I have a feeling the back half of the cycle will take a little of that growth away. Retailers and consumer companies are hurting . . . just look at Procter & Gamble (PG) today or Walmart (WMT) warning a few days ago.

Since these companies dominate the late earnings calendar, we’re probably not going to get through this with 6% year-over-year progress intact. But we’re probably going to get a little more than 4% and maybe more than 5%, which is a long way from catastrophe territory.

Companies that are earning more money than ever don’t dramatically pivot their strategies or cut staff to conserve cash through a really rough season. They might freeze hiring, but 2008-style mass layoffs are just not happening yet.

Amazon (AMZN) is an outlier. But that giant also swung from profit to a significant loss, so it’s arguably already in deep recession mode. Cutting 100,000 workers from the payroll will help it recover.

Unless there’s a lot of Amazon buried in the back half of the calendar, the job market will remain extremely tight. Consumers will keep spending. Cash will flow into corporate balance sheets.

Earnings will hold up. And that’s what we care about as investors. It’s also nice to think that household budgets on Main Street aren’t in immediate danger, but that’s not our priority here.

If we end up with 4-5% growth last quarter, all the best minds on Wall Street think the earnings trend improves from here. Apple (AAPL) has confirmed it. Last quarter might end up the worst year-over-year comparison of the cycle.

We’ll need to see earnings reaccelerate in order for this relief rally to turn into anything bigger. And there’s always the risk that all the guidance we’ve gotten was wrong and a complete disaster is lurking in the next wave of quarterly reports.

Those reports don’t arrive until October. For now, unless the Fed does something uncharacteristically dramatic or the economy encounters a shock, stocks are free to drift higher for the next few months.

Maybe the S&P 500 as a whole climbs 4-5% or even more. That doesn’t look huge over a three-month period, but it’s better than what the market as a whole generally does.

The NASDAQ is the big wild card. Big Tech earnings were all over the place, but on the whole the group did well enough to take QQQ another 9-10% in the next few months. That’s not the kind of move I like to watch from the sidelines.

The Sector View

And of course we aren’t prisoners of the big index funds. We want to make sure we overweight strength and underweight obvious weakness.

Those banks still represent obvious weakness. Relief is the only thing they have on their side for months to come . . . and relief can only take you so far.

In fact, earnings deterioration for the financials is trending about 3% steeper than it did when the season started. Forecasts and targets are getting worse.

As it is, earnings for most sectors are already worse than they were at the start of the season. A lot of big companies are missing their targets and lowering guidance.

The industrials are showing about 1.5% less growth than we hoped to see. Materials producers are feeling a little more inflationary pressure. Meta (META) weighs on the communications stocks.

AMZN was a nightmare for the consumer sector. On the upside, healthcare is turning into a bright spot and technology is hitting what was always a lackluster target on the whole . . . at least Big Tech isn’t actively shrinking.

Only energy is singlehandedly lifting the market as a whole. That’s going to continue into the current quarter and beyond.

In October, the financials will almost certainly still look weak. Big Tech will be at a standstill. Communications will be bleeding . . . thanks again, META.

We need AMZN to come back swinging to save the numbers for the consumer group as a whole. Otherwise, these stocks are unlikely to represent a real prize.

Consider a portfolio of three stocks for the coming three months: AMZN, XOM, CVX. Let’s see how well it stacks up against the market as a whole.