This weekly report presents insights from our Global Investment Management team.
Stock markets seem slightly revitalized after Federal Reserve Chair Jerome Powell’s testimony to the Senate Banking Committee yesterday. While confirming a fairly optimistic view of the economy, Powell also mentioned that the Fed will continue on its path of gradually raising rates “for now.”
The addition of those two little words has given some investors encouragement as earnings and monetary policy have been key drivers for markets amid a backdrop of worsening trade relations. Powell briefly touched on trade, stating it was “difficult to predict” the economic impact of the ongoing escalations. The Fed continues to walk a fine line between raising rates too quickly or too slowly to avoid issues with inflation, economic growth, and “financial market excess.” For now, investors are celebrating the potential for rates to remain lower, thereby adding support to the current valuation level in stocks.
The S&P 500 Index jumped almost a percent in intraday trading yesterday before settling 0.40% higher than the close on Monday. The gauge for large U.S. corporations has been resilient in the face of a difficult geopolitical environment as earnings results and better-than-expected economic data keep prices aloft – the index has gained over 3% so far in July alongside tariff enactments. Meanwhile, Chinese stocks entered a bear market earlier this month, declining over 20% from a high in January, according to the Hong Kong Stock Exchange Index. The 10-year Treasury yield, a proxy for many other financial rates, has remained relatively flat around the 2.85% mark; however, the U.S. dollar has climbed markedly over the past three months but may be holding steady.
A crucial support for the buoyancy of the U.S. stock market has been corporate earnings. The past few quarters have seen robust growth in both sales and earnings for many S&P 500 companies, particularly last quarter, when earnings grew an average of 23.7% and sales expanded 9.7% over the previous quarter, according to data aggregated by Bloomberg. While Wall Street analysts have set expectations quite high, corporations seem ready to take on the challenge – and even surpass it. In the current earnings season, 47 companies have reported so far, and only two have not exceeded their earnings predictions. The average earnings surprise over estimates is currently almost 5%, with quarter-over-quarter growth around 23%.
Our team continues to agree with the market – strong earnings results will likely keep stock prices at current levels, or push them even higher. While there are mounting risks within economic data and monetary policy, which hold substantial sway over investors, the current environment seems nothing but supportive to financial markets. The Global Investment Management team continues to view geopolitics as the largest risk currently, but big misses in earnings or an unexpected change in policy from the Fed would likely be a bigger spark for a market move.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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