The 1% Move Report

Wealth Management — July 19, 2022

• The S&P 500 Index climbed 2.7% to 3,937 on Tuesday. With the rally, the index is now down 17.4% year to date. 
• Equity markets experienced broad based gains in Tuesday's session as 98% of S&P 500 constituents and all 11 S&P 500 sectors closed the session higher. There were no clear directional drivers behind the sharp rally today, though the US Dollar Index fell for the third straight session after recently reaching 20-year highs, which could have helped lift broad risk sentiment. Cyclical sectors led with Industrials, Energy, Financials and Materials all gaining more than 3%. Markets will continue to monitor Q2 earnings season after a number of Financial companies reported mixed results last week.   
• All 11 S&P 500 sectors closed higher Tuesday, as Communication Services (+3.6%) and Industrials (+3.6%) outperformed the broad market while Consumer Staples (+1.1%) and Utilities (+0.7%) lagged.
• As of the 4pm equity market close, the 10-year Treasury yield rose to 3.02%, while 2-year yields rose to 3.23%. WTI oil rebounded to $104 per barrel, while the US Dollar Index declined modestly.

• Q2 Earnings Preview: Forty-six S&P 500 companies have reported results so far with 70% of them beating earnings expectations. Fifty-eight more companies are expected to report this week. For the S&P 500, bottom-up, blended 2Q22 earnings growth is anticipated to be 4.8% y/y as earnings from Energy companies are driving much of the growth, according to FactSet. Excluding Energy, second quarter earnings are expected to be down 3.4% y/y. During company 2Q22 earnings calls, investors will be closely monitoring forward guidance as well as vulnerability of margins and earnings due to headwinds from slowing growth, higher input costs and deteriorating demand conditions. 
• Monetary Policy: On June 15, the Federal Reserve met expectations by raising the Fed Funds rate by 75 basis points to a range of 1.50%-1.75%. This was the first such move since 1994. Chairman Jerome Powell cited continued inflation pressures, including the May CPI report, which showed headline inflation was the highest in 42 years, as well as the University of Michigan survey, which noted that consumer sentiment met an all-time low. The Chair also indicated that before the FOMC determines the speed at which the rate increases will progress going forward (including the potential for a 50- or 75-basis-point hike following the July 26 and 27 meetings), the committee will focus on incoming data and look for compelling evidence of a sequential decline in inflation readings. Last week, reports of continued inflationary pressures were released with June's 9.1% y/y headline CPI report. MS & Co. economists believe that Fed hikes will be front-loaded, expecting an additional 75-basis-point hike in July and a peak rate of 3.625% by year-end 2022. 
• Economic Calendar: Existing Home Sales (7/20); Jobless Claims, Leading Index (7/21); S&P Global US PMIs (7/22).

With the Fed poised to respond to 40-year highs in inflation through both rate hikes and balance sheet run-off in 2022, the GIC’s call for continued caution in the indices remains intact. Our June 2023 base case provides a target of 3,900 for the S&P 500. This scenario assumes earnings and revenue growth decelerates due to high cost pressures in a slowing growth environment. Our June 2023 bear case of 3,350 considers a slowdown in earnings growth rate, margin pressure, sticky inflation, and a recession. Our June 2023 bull case of 4,450 corresponds to a soft landing environment where earnings growth slows but remains positive, inflation decelerates, cost pressures ease, and confidence improves. This bull case forecast embeds an estimate of 17.9x forward June 2024 earnings. With earnings revisions moving lower off the prior peak, investors should focus on risk management through quality factor exposure, defensiveness with regard to interest rate sensitivity, and attention to stock-specific valuations. We are moving to a position of maximum diversification by sector and market cap, with interesting ideas in Energy, Industrials, Materials, Health Care, Consumer Services, Financials, Utilities and Staples. While the US recovery matures, we see opportunities outside the US as relatively more attractive, especially given less expensive valuations and exposure to economic cyclicality. In fixed income, the challenge is two-fold: generating sufficient income, while also preserving capital in a rising rate and higher inflation environment. This requires a diversified and active exposure, with our preference for core investment grade, preferreds, leveraged loans, and asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.

Market data provided by Bloomberg.

Consumer Price Index: Examines the weighted average of prices of a basket of consumer goods and services.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

University of Michigan Consumer Confidence Index: Measures three broad areas of consumer sentiment: personal finances, business conditions, and buying conditions.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.