July proved to be the best month for Wall Street equity investors since November 2020, a rally fueled by better-than-expected financial results from some of America’s largest companies and bets that the Federal Reserve would start its policy of restraining the economy sooner than previously expected could limit .
The S&P 500 rose 1.4 percent on Friday, extending its gain to 9.1 percent in July, its best month since the first announcements of an effective Covid-19 vaccine, which helped propel shares nearly 11 percent higher in November 2020 percent up.
It’s a sharp change in tone after a particularly difficult stretch. Investor sentiment was helped by signs that some of America’s largest companies are weathering economic headwinds, including slowing growth and rising interest rates. This week, big-name tech companies like Apple, Microsoft, Amazon and Alphabet — whose size and performance have propelled the stock market to new highs in recent years — reported results that gave investors relief. The proportions of all four were higher for the week and month.
At the same time, investors appeared to take solace from the Federal Reserve’s recent meeting, reading the central bank as poised to slow the pace of rate hikes as the economy begins to cool. Rising interest rates raise costs for businesses and weigh on profits, leaving investors braced for signs of easing from the Fed’s current policy.
“Despite weaknesses, returns were decent,” said Alex Atanasiu, portfolio manager at Glenmede Investment Management. He added that despite the Fed’s rate hike on Wednesday, longer-term Treasury yields, which help set the cost of borrowing around the world, have fallen along with expectations for more rate hikes, “and that’s bolstering equities.”
What the Fed’s rate hikes mean for you
A toll for borrowers. The Federal Reserve has raised the Federal Funds Rate, its policy rate, to curb inflation. By raising the interest rate that banks charge each other for overnight loans, the Fed is triggering a domino effect. Whether direct or indirect, a number of consumer borrowing costs are increasing.
Of the 278 companies in the S&P 500 that have reported earnings so far, 209 have beaten analysts’ expectations, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Amazon’s stock price rose more than 10 percent on Friday after its earnings report on Thursday, adding about $140 billion to the company’s market valuation. Amazon is one of the best-performing stocks over the past month, up more than 27 percent. Given its market value of around $1.4 trillion and its weight in the S&P 500 index, this move had a major impact on the index’s performance.
Only Apple, the world’s largest company with a market value of about $2.6 trillion, had a bigger impact on the S&P 500 this month. Apple stock rose almost 19 percent in July.
There were bright spots elsewhere too. European stocks rose nearly 8 percent for the month despite concerns over Italy’s economic and political health and growing fears of a winter natural gas shortage. In corporate bond markets, the bonds of riskier “junk”-rated companies returned more than 5 percent, according to a Bloomberg-run index that had its best monthly performance since October 2011.
But despite the strong performance, some investors remain cautious, warning that the recent rally could fade just as quickly.
“I think we’re going to have a difficult time in the second half of the year where economic data continues to show eroding growth and inflation may not be coming down as quickly as people are hoping,” said David Donabedian, the US private’s chief investment officer -Wealth business from CIBC.
The move higher reflects that the latest updates from American companies are not as bad as feared, which is different from these results being good. Investors pushed the S&P 500 down over 8 percent in June, ahead of the latest earnings numbers, and the index remains about 14 percent below its January peak.
Some investors also said there is a willingness to continue buying stocks while inflation is so high because other, safer assets don’t offer the returns that allow them to resist the erosive effects of rising prices.
“I’m not as confident as the market seems,” said Lauren Goodwin, economist at New York Life Investments. “But running for the hills when inflation is so high just weighs on returns. We have to stay invested.”