By Michael O’Connor

While recent inflationary data has been positive and pricing pressure has been on a downward trend, we are not out of the woods just yet.

As we move forward, the focus will likely shift from rising inflation to softening economic data and the negative effects this may have on company earnings.

For now, we are likely in the interlude between inflation peaking and economic data slowing significantly, somewhat of a momentary sweet spot.

Remember, there will always be risk. The particular risk that we are most preoccupied with just changes over time.

Market Outlook

I'm not bearish, but I do think that return expectations need to be modified.

We have just ended a period of unprecedented liquidity. Money was free. The Fed Funds Rate sat at 0.3%. The 10-year Treasury was 0.72%. The federal reserve doubled its balance sheet from $4.5 Billion to $9 Billion.

These were not normal conditions, and these conditions gave rise to unadulterated risk-taking.

The market is now resetting to more 'normal' conditions where the Fed is no longer willing to remove any and all downside risk.

Moving forward, the market recovery is more likely to be more U-shaped than V-shaped this time around. This simply means a recovery will take longer than we have recently experienced as the liquidity and support that fuelled previous reversals gets stripped out of the market.

That's not to say that upside doesn't exist. There is still an abundance of companies with the ability to generate consistently strong earnings over time. Still, the general upward trend of the market may be slower relative to what we have experienced in recent years. Liquidity pulled forward a lot of the expected returns, and that will take time to reset.

My Holdings

In my view, pullbacks in the stock market are still buyable. I recently topped up positions in Microsoft and Berkshire Hathaway, for example.

Other names I have been purchasing are less focused on pullbacks and more on the shift in secular trends in the market. An energy market that has experienced a complete lack of investment in infrastructure in the past decade, growing demand and no immediate substitute has created some powerful supply/demand dynamics for the likes of Exxon. Stranded asset risk exists but still represents a solid medium-term play and has worked well so far this year as other areas detract.

Finally, I will re-look at some decimated stocks over the coming weeks. Twilio is down +80% in recent months (currently trading at roughly $72 off a high of $435), but Q2 earnings beat expectations, and I do like the long-term viability of the company, so it's time to see if the current price represents a more digestible entry point. Bear in mind, momentum is still very much against this one, and lack of profitability will likely keep it out of favour over the short term.

For free weekly stock tips and direct access to my personal investment portfolio, go to www.theislandinvestor.com.