Market Pulse

In focus

There continues to be many crosscurrents facing investors. Top of mind right now is the Federal Reserve (Fed), the state of the U.S. economy, and corporate earnings.

The Federal Open Market Committee (FOMC) meeting two weeks ago produced another 75 basis point (0.75%) rate hike, while Gross Domestic Product (GDP) illustrated the U.S. economy experienced contraction for the second consecutive quarter. Fed Chair Powell’s prepared remarks following the FOMC meeting were interpreted in vastly different ways by market participants. While the notion of a more dovish rate policy emerged from some, several Fed officials took the opportunity last week to reiterate the Fed’s aggressive stance on inflation, countering thoughts of a more dovish approach.

On the economic front, despite back-to-back negative quarters of GDP growth, the July jobs report last week was inconsistent with an economy in recession. In July, 578K new jobs were added, more than doubling consensus estimates and showing that the demand for workers remains strong. The unemployment rate also ticked down to 3.5%, reaching its pre-pandemic low.

Corporate earnings have been an important driver for markets as investors, so far, have been rewarding outperformance by the largest amount since 2019. Results from 87% of the S&P 500 companies have been better than feared, with 75% of companies producing earnings which have exceeded market expectations. Furthermore, what stands out about the current earnings season is that the average company’s stock price has risen following an earnings miss. This is the first time in five years this has occurred and perhaps signals that markets had priced in too much bad news.

A look back

• Global equities finished the week in positive territory, with modest gains from U.S. and emerging markets, while international developed markets declined.
• As investors priced in the chance of a more hawkish Fed, bond yields across the curve increased. The 2/10-year U.S. Treasury yield curve further inverted to 40 basis points (0.4%).
• For the first time since 1995, the Bank of England raised interest rates by 50 basis points (0.5%) and publicly forecasted that the United Kingdom will enter an extended recession by the end of the year.

A look ahead

• Of the 13% of companies in the S&P 500 that have yet to report second quarter results, 23 are on deck this week. So far, markets have rewarded positive earnings surprises by over 2%.
• Investors will be watching the July CPI report this week for signs of cooling inflation and any potential shift in policy from the Fed as a result.
• Economic Releases: Consumer Price Index (CPI), Empire Manufacturing, NFIB Small Business Optimism, Producer Price Index, Univ. of Michigan Sentiment, and Wholesale Inventories.