Stocks Gain, Uncertainty Ahead

Telemus Weekly Market Review July 18th - July 25th, 2022

Stocks rebounded as sentiment seemed to improve as the week went on. The S&P 500 added +2.6% with economic sensitive sectors such as consumer discretionary, materials and industrials leading the way. There were several positive economic datapoints during the week that supported the market’s move including better than expected retail sales, improvement in consumer sentiment and a recovery in manufacturing data. These positive indicators were more than enough to offset what looks to be a slow cooling to the housing market.

Many investors have had a cautious stance on equity markets as they await a reset in earnings expectations given softening economic conditions. Market valuations have begun to reflect this changing trend, while analysts’ estimates have yet to incorporate this increasing reality. What we’ve noticed from the early stages of second quarter earnings reports is diverging conditions across sectors. Financials are holding up well. Higher interest rates are leading to higher revenues. While banks are reserving more for some greater loan losses assuming a slowdown in the economy, their revenue growth has more than outpaced this. This week we saw weakness in the Communication Services sector with telecommunications companies Verizon and AT&T both falling over 10% late in the week as their forecasts for the business caused some angst among investors.

Bonds also added gains during the week as yields on intermediate and long-term bonds fell. This led to price gains for these bonds. The Treasury yield curve continues to flatten with less than a one percentage point difference in yields between one month and 2-year Treasuries. This difference was nearly two percentage points a month ago. Changes in municipal bond yields were much more muted. This resulted in more modest gains for this sector of the bond market.

As we look ahead, we expect an eventful week packed with news and incremental datapoints. The pace of companies reporting second quarter earnings will accelerate, providing a deeper perspective on corporation’s forecasts for the future. In addition, all eyes will be on the Federal Reserve as they announce their latest interest rate hike on Wednesday. Expectations are for a three quarters of a percent hike. Lastly, on Thursday the Bureau of Economic Analysis will publish the U.S. Gross Domestic Product (GDP) for the second quarter. Economists expect the U.S. economy to grow by a modest +0.5% for the quarter. This is more optimistic than the Atlanta Fed’s GDPNow forecasting tool, which projects the economy shrinking by a -1.6%. Should a drop in GDP occur, it would market the second consecutive quarter of declining GDP, meeting the technical definition of a recession.

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