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A Financial Flurry

Investment Insights: Market Update
HIGHLIGHTS:
  • A flurry of news about the economy, Fed rates, and the second-quarter earnings season will likely decide the market’s near-term direction.
  • As expected, the Fed raised its key overnight rate by 0.75 percent today.
  • GDP projections for the second quarter have been increased, with stronger numbers in the back half of the year..
  • Wall Street is expecting earnings to grow by 4.8 percent this quarter and by 9.8 percent in 2022.

There’s no shortage of events this week for financial markets. A flurry of news, including economic data releases, a rate decision from the Federal Reserve, and the second-quarter earnings season in full swing, will likely decide the market’s direction over the near term. Economic data has been mixed lately, given the declines in manufacturing and consumer confidence gauges this week. However, housing has maintained some of its steam, with new home sales coming in just below expectations and broad home prices continuing to increase. Encouragingly, today’s durable goods orders showed demand picked up some steam, with a 1.9 percent increase compared to projections for a half-percent decline. That, combined with positive results in the US trade balance, has improved expectations for growth in the second quarter. Investors will have to wait until tomorrow to get the announcement, but GDP is now expected to have risen by 0.4 percent. US economic growth is forecast to rise to 1.7 percent and 1.3 percent, respectively, in the third and fourth quarters this year. While these projections will likely equate to growth near long-term trend levels, recession expectations don’t appear to be anywhere in sight.

The Fed ended its July meeting today and, as expected, raised rates for the fourth time this year, lifting its key overnight rate by 0.75 percent. That is exactly what the markets had been predicting, with fed funds futures showing investors had bet heavily toward a smaller increase versus the rumored full-percent move. This could also mark an important turning point for the Fed’s rate guidance as officials closely monitor inflation. The recent drop in commodity prices and other consumer goods inputs could be signaling that inflation has finally peaked. Investors have been lowering their forecasts for the Fed, which now reflect a half-point hike at its next meeting in September and smaller increases afterward. However, bets for rate cuts have been a more controversial topic, with markets forecasting a rate cut at the Fed’s March meeting next year.

With a seemingly improving economy and the Fed becoming a little less aggressive, it appears financial markets may be poised for a rebound heading into the second half of the year. The last piece of the puzzle will likely stem from corporate earnings. The second-quarter earnings season is in full swing, with 180 companies having already reported and another 270 reporting in the next two weeks. Earnings for S&P 500 companies are continuing the trend of coming in higher than expected, beating estimates by an average of 3.6 percent so far. Energy and industrial names are leading earnings growth, which is projected to be a solid 4.8 percent for the quarter. Analysts are expecting earnings growth will continue in the back half of the year, with 9.2 percent in the third quarter and 8.7 percent in the fourth. If company results keep beating estimates, strong fundamentals should help share prices recover.

Market Dashboard
Financial market data for various time periods covering global asset classes.  Data as of July 26, 2022.
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Contributors

[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
, CFA
Chief Investment Adviser