Equity Overview

Every sector in the S&P 500 rose in July.  Growth stocks dramatically outperformed value stocks.  Volatility continued unabated, as the S&P 500 moved more than 1% on 10 of 20 trading days—but unlike in previous months, 8 of the 10 moves were to the upside.

Second quarter earnings reported in July were healthy but showed deceleration.  With 56% of S&P 500 companies reporting, 73% beat consensus earnings expectations and 66% beat consensus revenue expectations—but in both cases the beat rates were lower than the one-year and five-year averages.  And the magnitude of earnings beats was less than stellar, averaging 3.1% above consensus expectations versus the one-year average of 9.8% and the five-year average of 8.8%.

Macro Overview

Economic data reported in July were mixed.  Payrolls advanced, retail sales rose, and unemployment was low at 3.6%.  But housing was weak and manufacturing expanded at the slowest pace in two years.

More significantly, inflation remained elevated at 9.1% year-over-year.  In response, the Fed raised short-term interest rates by 0.75%, its second increase of that amount this year.  Chairman Powell reiterated that the Fed will take whatever measures are necessary to bring inflation back to the Fed’s 2% target.

The Commerce Department reported that GDP fell at an annualized rate of 0.9% in the second quarter, on the heels of a 1.6% drop in the first quarter.  This raises concern in the markets because the traditional definition of a recession is two consecutive quarters of declining GDP.  However, consensus among economists is that, when considering other factors which show signs of strength, including measures of income, spending, and employment, the GDP decline alone does not mean that recession is imminent.  Nonetheless, we expect the issue to predominate in financial news in the months ahead.