Wealth Management — July 29, 2022
- It was another day of gains on Wall Street, with the S&P 500 Index rallying for the third straight session and fourth out of the past five. The index rose 1.4%, closing at 4,130 and finished 4.3% higher on the week, the highest weekly return in over a month.
- Markets were faced with a slew of corporate Q2 earnings reports this week in addition to Wednesday's FOMC meeting. While earnings results were mixed, it appeared tempered expectations going into the season helped stocks rally strongly off of earnings beats. Next week, more Q2 earnings releases and economic data will be in focus, with the ISM PMIs and July jobs report on the docket.
- The pace for today's gains seemed to be driven by strong earnings from both a mega cap e-commerce leader and multinational technology company that reported after the close on Thursday.
- Nine of the 11 S&P 500 sectors closed higher Friday. Energy (+4.5%) and Consumer Discretionary (+4.3%) were the largest relative outperformers while Health Care (-0.4%) and Consumer Staples (-0.7%) lagged.
- As of the 4pm equity market close, the 10-year Treasury yield declined to 2.67% and 2-year yields increased to 2.87%. WTI oil moved higher to just above $98 per barrel, while gold rose to $1,760 per ounce. The US Dollar Index declined modestly.
- Q2 Earnings: Thus far, 56% of the S&P 500 has reported results, with 74% beating earnings forecasts and 60% surpassing expectations for revenues. This week, guidance and 2Q earnings results have been better than anticipated for a number of technology and retail-related companies. Next week, 153 companies are expected to report. Energy and Industrial company earnings are driving much of the growth, with S&P 500 2Q22 blended earnings growth currently at 7.7% (-2.6% excluding Energy), according to I/B/E/S data from Refinitiv.
- Monetary Policy: On Wednesday, the Federal Open Markets Committee (FOMC) announced its unanimous decision for a second consecutive 75-basis-point rate hike. Additionally, Fed Chair Powell indicated that future rate decisions will be made meeting by meeting and "another unusually large increase could be appropriate at the next meeting. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases." MS & Co. economists forecast a 50-basis-point hike at the September FOMC meeting. Regarding the balance sheet reduction program, which is anticipated to ramp through September, Fed Chair Powell communicated that the process to get back to equilibrium may take two to two-and-a-half years.
- Economic Calendar: ISM PMIs, Construction Spending (8/1); JOLTS Job Openings (8/2); Durable Goods Orders, S&P Global PMIs, ISM Services PMI (8/3); Jobless Claims (8/4); Nonfarm Payrolls, Consumer Credit (8/5).
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.
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.
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.