July turned out to be the best month for equity investors on Wall Street since November 2020, a rally fueled by better-than-expected financial results from some of America’s biggest companies and bets that the Federal Reserve could cut its policy of restricting the economy sooner than expected. .
The S&P 500 rose 1.4% on Friday, taking its July gain to 9.1%, its best month since early announcements of an effective Covid-19 vaccine helped push stocks up nearly 11% in November 2020.
It’s a sudden change in tone after a particularly difficult stretch. Investor sentiment was boosted by signs that some of America’s biggest companies are successfully weathering economic headwinds, including slowing growth and rising interest rates. This week, big tech names like Apple, Microsoft, Amazon and Alphabet – whose size and performance have pushed the stock market to new heights in recent years – reported results that gave investors relief. The shares of all four were higher for the week and the month.
At the same time, investors appeared to take solace from the Federal Reserve’s latest meeting, interpreting the central bank as willing to slow its pace of interest rate hikes as the economy begins to cool. Rising interest rates are increasing costs for businesses and weighing on earnings, making investors alert to signals of easing in current Fed policy.
“Despite pockets of weakness, earnings have been good,” said Alex Atanasiu, portfolio manager at Glenmede Investment Management. He added that despite the Fed raising interest rates on Wednesday, longer-term Treasury yields, which help fix borrowing costs around the world, fell on expectations of further interest rate hikes. interest, “and that reinforces the actions”.
What the Fed’s rate hikes mean for you
A toll for borrowers. The Federal Reserve has raised the federal funds rate, its key interest rate, as it tries to contain inflation. By raising the rate, which is what banks charge each other for overnight lending, the Fed triggers a ripple effect. Whether directly or indirectly, a number of borrowing costs for consumers are increasing.
Of the 278 S&P 500 companies that have reported earnings so far, 209 have exceeded analysts’ expectations, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Amazon’s stock price soared more than 10% on Friday after its earnings report on Thursday, adding about $140 billion to the company’s market valuation. Amazon was among the best performing stocks last month, up more than 27%. Due to its market value of around $1.4 trillion and the way the S&P 500 index is weighted, this move had a big impact on the index’s performance.
Only Apple, the world’s largest company with a market value of around $2.6 trillion, had a bigger effect on the S&P 500 this month. Apple shares jumped nearly 19% in July.
There were positives elsewhere as well. European stocks rose nearly 8% for the month, despite worries about Italy’s economic and political health and growing fears of a natural gas shortage as winter approaches. In corporate bond markets, the debt of riskier, junk-rated companies returned more than 5%, according to an index run by Bloomberg, which posted its best one-month performance since October 2011.
Yet despite the strong performance, some investors remain cautious, warning that the recent rally could dissipate just as quickly.
“I think we’re going to have a tough time in the second half of the year, where the economic data continues to show that growth is eroding and inflation may not come down as fast as people are hoping,” David Donabedian said. , Chief Investment Officer. of CIBC’s private banking business in the United States.
The move up is a reflection of the fact that the current round of US corporate updates is not as bad as feared, which is different than these results being good. Investors sent the S&P 500 down more than 8% in June, ahead of the current earnings crop, and the index remains about 14% below its January peak.
Some investors have also said there is a willingness to keep buying stocks when inflation is so high because other, safer assets aren’t offering the returns that allow them to defend against the negative effect. erosion of rising prices.
“I’m not as optimistic as the market seems to be,” said Lauren Goodwin, economist at New York Life Investments. “But running for the hills when inflation is so high is just a drag on returns. We have to stay invested.