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July 2023 | Equity Commentary

July 2023 | Equity Commentary


Published on August 16th, 2023

Last month we wrote about the U.S. economy staving off a recession in spite of monetary tightening and broad expectations for a downturn. In July, the Commerce Department confirmed that the U.S. economy continued to grow in the second quarter. The “advance” estimate for annual GDP growth in Q2 2023 was 2.4%, which would mark an acceleration from Q1’s 2.0% rate.1 The “advance” estimate is subject to revision, but the takeaway remains that the U.S. economy is performing better than expected. We believe economic growth combined with stable activity in the jobs market has shifted market expectations towards a “soft landing,” which arguably contributed to the S&P 500 index’s 3.2% gain in July.2 The 10-year U.S. Treasury bond yield also rose 12 basis points in the month, from 3.84% to 3.96%,3 which we would expect to see in response to economic resilience. Looking ahead, history suggests there is a meaningful probability that stocks also perform well in the second half of the year. Since 1970, when the first six months’ return for the S&P 500 was between +10% and +20%, the average second half return was +10.7%, with positive returns 100% of the time.4

A majority of S&P 500 companies have now reported Q2 earnings, and the results appear mixed. FactSet reports that 79% of reporting companies (as of August 4) delivered better than expected earnings-per-share (EPS) results, which is higher than both the 5- and 10-year averages. 65% of S&P 500 companies reported beating revenue estimates, which is below the 5-year average of 69% but above the 10-year average of 63%. Overall earnings are expected to decline by roughly 5% year-over-year in Q2, which is the weakest showing for earnings since 2020.5

On the bright side, we noted many corporations citing resilient U.S. consumers in their reports. Anecdotally, Amazon posted earnings that were nearly double analysts’ estimates, with a large positive contribution coming from its core e-commerce business.6 Consumers also appear to remain enthusiastic about travel this summer, with Airbnb reporting a Q2 profit jump of over 70% from Q2 2022.7 Steady consumer spending data squares with data we’ve seen from the University of Michigan and the Conference Board pointing to improving consumer sentiment. The University of Michigan reported that consumer sentiment rose 11% from June, reaching its highest level since October 2021.8

Activity in the U.S. services sector also remains reasonably healthy. S&P Global reported that Services PMI was 52.3% for July, which is pretty firmly in expansion territory but does mark a deceleration from June’s 54.4% print. The Institute for Supply Management similarly reported July Services PMI at 52.7%, which was 1.2% lower than June’s 53.9% reading. While services activity has been positive for economic growth, the manufacturing sector has been contracting for several months. S&P Global reported July Manufacturing PMI at 49% while ISM reported 46.4%. The upshot is that manufacturing activity, while still somewhat depressed, appears to be improving—both S&P Global and ISM reported better activity in July than in June.9

The Labor Department reported that nonfarm payrolls rose by 187,000 in July, following a revised 185,000 in June. While positive, these figures mark a material slowdown in hiring from last year’s 399,000 new jobs per month pace (on average), and also the 287,000 jobs per month average for the first five months of 2023. Insofar as a slowing pace of hiring reflects a cooling economy, it will factor as positive news for the Federal Reserve and may reduce market expectations for additional rate hikes. Wage pressures remain an issue, however, as private-sector pay increased 4.4% year-over-year in July. This pace of wage gains is not compatible with the Fed’s 2% inflation target.10

In June, inflation as measured by the core personal consumption expenditures (PCE) price index came in at 4.1% year-over-year. Core prices rose 0.2% from May to June. Price pressures have been easing substantially since last year, but 4.1% is still roughly double the Fed’s target.11 Wage gains factor as a negative in the inflation fight, but positive signs exist elsewhere – the producer price index (PPI), for instance, increased just 0.1% month-over-month in June, and final demand less foods, energy, and trade services was up 2.6% year-over-year.12

In the realm of monetary policy, the Federal Reserve raised the benchmark fed funds rate by another 25 basis points at their July meeting, as expected. This move pushed fed funds to a 22-year high, now at a range between 5.25% and 5.5%.13 The Fed’s move did not come as a surprise to markets, but other central bank decisions in late July did – and they happened on the same day.

On July 27, the European Central Bank (ECB) raised rates by 25 basis points, as expected. But what surprised markets was an indication that the ECB may be ready to pause hikes for now, which seems premature given still elevated inflation and commodity price volatility considering the region’s proximity to the Russia-Ukraine war. Europe’s labor force is also more unionized than the U.S., which we would argue makes it more vulnerable to a wage-price spiral.14 The Bank of Japan also surprised markets on the same day by loosening their yield curve controls, which may have contributed to a recent increase in U.S. Treasury yields as investors shifted capital from the U.S. to Japan.15

Finally, China’s economy continues to show real signs of struggle. Exports fell by -14.5% in July, marking the biggest year-over-year decline since the heart of the pandemic in February 2020. Imports also fell by -12.3% over the same period, indicating that the surge in domestic demand many economists were anticipating (post-zero Covid) has not materialized. And where the rest of the developed world is battling price pressures, China has the opposite problem – CPI in July fell -0.3% year-over-year, with producer prices dropping -4.4% over the same period, according to the National Bureau of Statistics. The government’s response thus far has been relatively toothless, in our view, with no concrete plans for meaningful levels of fiscal stimulus.16



[1] Gross Domestic Product _ U.S. Bureau of Economic Analysis (BEA).pdf

[2] Bloomberg: SPX Index TRA

[3] Bloomberg: USGG10YR Index TRA

[4] Bloomberg: 1st Half Returns Analysis

[5] EarningsInsight_080423.pdf

[6], Inc. – Announces Second Quarter Results.pdf

[7] Airbnb profit jumps to $650 million in 2Q as bookings increase, rental rates hold steady – CBS San Francisco.pdf

[8] Surveys of Consumers.pdf

[9] July 2023 Manufacturing ISM® Report On Business®.pdf

[10] U.S. Economy Added 187,000 Jobs in July in Latest Report – WSJ.pdf



[13] Fed meeting July 2023_ Fed approves hike, interest rates rise to highest level in more than 22 years.pdf

[14] ECB rate decision July 2023_ raises rates by 25 basis points.pdf

[15] Bank of Japan loosen’s YCC, cites ‘greater flexibility’ and jolts markets.pdf

[16] China consumer prices fall first time in 2 years, deflation fears grow.pdf

As of July 31, 2023


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