July 2022 Review and Outlook
Executive Summary:
- Markets rallied despite hotter-than-expected inflation print
- Federal Reserve hiked rates 75bps but pivoted to data dependency going forward
- U.S. GDP print was negative for the second straight quarter
- 10Y yields recorded the biggest one-month decline since March 2020
- S&P 500 reporting its lowest earnings growth since Q4 2020
Stocks shrugged off a second consecutive negative GDP print, a 75bp rate hike from the Federal Reserve, and hotter-than-expected inflation data while corporate earnings kicked off. The Nasdaq-100 had its best month since March 2020, while the S&P 500 had its best month since November 2020. Growth stocks sharply outperformed value, as long-duration securities fared well throughout the month.
Despite the Fed’s continued commitment to bringing inflation back down to its target rate, the market’s expectation turned to an easing of the frontloaded rate hikes, with “bad news is good news” coming back into play. Inflation data continued its trend of unwelcome surprises, as the “peak inflation narrative” failed once again with a YoY print of 9.1% vs. expected 8.8% and 1.3% vs. expected 1.1% in the MoM print. Furthermore, recession fears picked up throughout the month as the economy contracted for a second straight quarter in Q2, printing a -0.9% figure versus an expected +0.4%. We have never had two consecutive negative GDP prints without a recession, so despite strong job openings data, some are arguing that the NBER will eventually declare that we are indeed in a recession. July flash services PMI slid into contraction, while the July flash manufacturing PMI also dropped to the lowest level in two years. Additionally, initial jobless claims ended the month at an eight-month high, with a flurry of high-profile hiring freezes and layoff announcements. Finally, Consumer Credit continued to climb, while personal savings fell to levels last seen in 2016.
On a total return basis, all sectors began 3Q22 higher, with Consumer Discretionary leading the way returning 18.9%. Technology stocks also returned double digits in July, ending higher by 13.5%, followed by Energy, Industrials, REITS and Financials, all of which returned >7%. Basic Materials and Utilities were in the midfield, returning 6.1% and 5.5%, respectively, while Communications, Healthcare, and Staples lagged, with each returning <4%.
GDP
CPI YoY
CPI MoM
Rate Hike Odds
2y Government Bond Rates
10y Government Bond Rates
Jobless Claims
Consumer Credit
Personal Savings
WTI Oil
Earnings
While the Federal Reserve and inflation data remained at the forefront, July also saw the kickoff of the 2Q ’22 earnings season. Similar to last quarter, corporates had difficult comps versus unusually high earnings growth in Q2 ’21, leading to the lowest earnings growth since Q4 ’20.
To date, 56% of companies in the S&P 500 have reported results for Q2, with 73% reporting EPS above estimates, vs. a one-year average beat rate of 81% and a five-year average of 77%. Companies are beating earnings by an average of 3.1%, below that one-year average of 9.8% and the 5-year average of 8.8%, according to Factset. When looking at revenue growth, ~66% of companies have reported revenue above estimates, slightly below the five-year average of 69%, with an average beat of 2.5%. This figure is below the one-year average of 3.2% but above the five-year average of 1.8%.
Q2’s earnings growth of 6.0% is actually better than the 4.0% expected at the beginning of the quarter. This, along with the fact that analysts have not taken down estimates for the second half by as much as feared, has been supportive of stock prices. Currently, Q3 and Q4 earnings growth estimates are 6.7% for both quarters, down from about 10% for each, as companies seem to be holding on to above-average profit margins.
Per Bloomberg estimates, Consumer Staples companies again led the way in terms of the number of companies reporting earnings surprises with 84% beating estimates, followed by Real Estate with 82%. The Communications sector saw the least number of beats, with only 67% of companies reporting earnings surprises, just below Consumer Discretionary’s 68%. Energy stocks reported the largest beats with an average of 10.0%. From a growth perspective, 100% of Energy companies reported positive earnings growth, with an average growth rate of over 298%. 82% of Industrials companies reported earnings growth at an average of just under 41%.
The forward 12-month PE for the S&P 500 is 17.1, which is below the five-year average (18.6) but above the 10-year average (17.0).
In terms of price action following earnings prints, Energy stocks have seen the biggest 1-day move relative to earnings surprise. On average, energy names are seeing share prices climb just over 3.2% after reporting, followed by Consumer Discretionary and Real Estate at 2.2%. Utilities are also seeing positive price action with an average gain of 2.0%, while Technology, Industrials, Financials, and Healthcare are all seeing between 0.1%-0.6% gains after reporting. Consumer Staples are seeing the worst price action, falling on average 0.8%, followed by Materials’ 0.4% drop and Communications’ 0.3%.
Looking Ahead
August will see the remainder of the Q2 ’22 earnings season, as well as a slew of key economic data, including CPI prints on Aug. 10. It should be noted, though, that the Federal Reserve will not meet again until late September, so we won’t be getting any additional rate hikes until then unless there is a surprise in store. Over the last 50 years, the month of August has seen an average return of -0.13%, with 27 years in the green and 23 in the red. Only September saw worse returns during that time frame, with an average return of -0.91%.
The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as , either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The Market Intelligence Desk Team
Nasdaq
Nasdaq’s Market Intelligence Desk (MID) is designed to provide critical touch-points for timely trading analysis and market information.