July 2023 Review and Outlook
Executive summary:
- Nasdaq, S&P rise for fifth straight month
- Dow climbs 13 straight days, one off the record set in 1987
- Federal Reserve hiked rates 25bps to 5.25-5.50%, nearing the end of its hiking cycle
- Small & Micro caps outperform Mega caps – reversing the recent trend
- 2Q Earnings – blended earnings decline of -7.3% would mark the largest earnings decline since Q2 2020
- Crude rallies behind improved demand and supply constraints
To kick off the third quarter of 2023, the market saw continued economic surprise momentum, reinforcing the soft-landing narrative but leaving the door open for further Fed rate hikes. The disinflationary narrative also continued to grow louder, with June core PCE inflation printing 0.2% MoM and 4.1% YoY which was the softest reading since September ’21. Q2 GDP came in at 2.4% (SAAR), well above the 1.5% consensus expected, reflecting robust consumer spending. Consumer confidence also printed at its highest level since mid-2021, with increased optimism about the labor market. Furthermore, initial and continuing jobless claims were both below forecasts, while headline durable goods orders for June were better than expected, including core capital goods orders. One of the few misses, though, was the June new-home sales report which came in below expectations and saw May figures revised lower.
The Federal Reserve hiked interest rates 25bps raising the target rate to 5.25-5.50%, which was widely expected in the market. While there were no real surprises to come out of the meeting, the big question facing the market is whether the board has reached its peak rate or if we are in store for one or more hikes to close out the year. During the press conference following the meeting, Chairman Powell noted the Fed’s 2% inflation target “has a long way to go” but did leave room to potentially hold rates steady at the next meeting in September. “I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted.” Despite the comments, markets are currently pricing in a less than 50% chance for another 25bp rate hike the year.
July also saw the first half of 2Q ’23 earnings prints. At the mid-point of the season, S&P 500 companies are reporting a blended earnings decline of -7.3%, the largest decline since Q2 2020. The number of companies reporting positive EPS surprises is above recent averages, with the magnitude of those earnings surprises below recent averages.
On a total return basis, all sectors ended the month higher, led by Energy stocks which finished higher by 7.4%, followed by Communications +6.9%, and Financials +4.8%. Healthcare was the laggard, returning only 1.0%.
Headline Inflation YoY:
PCE – Household Consumption:
U.S. Retail Sales:
Consumer Sentiment:
New Home Sales:
Oil:
Earnings:
With 51% of S&P 500 companies reporting Q2 earnings, 80% have reported a positive EPS surprise and 64% have reported a positive revenue surprise. The average EPS beat was just under 5.7%, with an average revenue beat of under 1.7%. The 80% beat rate is above the 5 and 10-year averages of 77% and 73%, respectively, but the 5.7% surprise is below the 5 and 10-year averages of 8.4% and 6.4%, respectively. The current blended earnings decline of -7.3% would mark the largest earnings decline since Q2 2020 (-31.6%) and the third straight quarter in which the index has reported a decrease in earnings.
Consumer Discretionary stocks reported the largest EPS upside with an average beat of ~12.4%, followed by Communications with 7.6% and Industrials with 7.0%. Top-line beats were also led by Consumer Discretionary, with an average surprise of 5.3%, followed by Real Estate with 3.2%.
On the growth front, 68% of companies have reported revenue growth, with 30% declining and 2% flat, with an average growth rate of just under 2.1%. Materials companies took the biggest hit, with only 31% reporting growth, with an average decline of (-11.8%). Consumer Discretionary, on the other hand, had 68% of companies reporting growth, with an average upside of 16.4%. Earnings growth has also been mixed, with only 60% reporting growth, 38% falling, and 2% in line, with an average EPS growth rate of 3.9%. Energy saw the largest decline at (-48.7%), followed by Materials (-12.9%), while Communications EPS growth rose 83%, followed by Consumer Discretionary at 21.5%.
The forward 12-month PE for the S&P 500 is 19.4, which is above the five-year average (18.6) and 10-year average (17.4), according to FactSet.
In terms of two-day price action following earnings prints, Materials saw the largest gains with an average jump of 0.9%, followed by Energy at 0.6%. All other sectors saw two-day declines after reporting, with Real Estate stocks falling the most at -2.7%, followed by Utilities at -2.3%, and Consumer Staples at -1.8%.
Rates:
Yield Curve:
Fed Expectations:
Looking Ahead:
August will see the remainder of the Q2 ’23 earnings season, as well as a slew of key economic data, including CPI prints and Jobless claims on 8/10. While the Federal Reserve will not meet again until late September, the August data will be key drivers of their potential policy changes. Over the last 50 years, the month of August has seen an average return of -0.27%, with 26 years in the green and 24 in the red. Only September saw worse returns during that time frame, with an average return of -1.08%.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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.