Equity Overview

Large cap stocks outperformed small cap stocks in July (reversing a three-month trend), and value stocks continued to outperform growth stocks for the second month in a row.

2nd quarter earnings reported in July were impressive.  With 81% of S&P 500 companies reporting, the blended growth rate for earnings was 24.0%, which was even higher than the remarkable 1^st quarter growth rate of 23.2% at this point in the earnings season.  In addition, 80% of companies beat consensus earnings estimates and 74% beat consensus revenue estimates, both numbers higher than the 1-year and 5-year averages.

Macro Overview

Tariffs and trade wars continued to dominate economic news in July, but without significant impact on the stock market.  However, the Fed expressed concern.  It released the minutes of its previous meeting which noted that “uncertainty and risks associated with trade policy intensified” and stated that most members “were concerned that such uncertainty and risks eventually could have a negative effects on business sentiment and investment spending,”

Economic data reported in July were generally positive.  Manufacturing and retail sales were strong and unemployment remained low.  The Commerce Department reported that GDP rose in the second quarter at an annual rate of 4.1%, the highest rate in four years.

In commenting about the extraordinary level of stock buybacks this year (on track to set a new record of $800-billion) we have pointed out that this phenomenon was inconsistent with the stated justification for the tax cut, which was supposed to encourage companies to raise the wages of their employees.  Now it appears that the buybacks are not benefiting companies as much as was hoped.    According to the Wall Street Journal, 350 companies of the S&P 500 have bought back stock this year but 57% of those companies have gained less than the S&P as a whole—the highest percentage of S&P 500 companies to fall short of the index performance since the onset of the financial crisis in 2008.