Economic Data and Market Highlights
Globally, stocks continued their rise as the MSCI ACWI advanced 1.37%. US stocks rallied as the CPI fell in June. The rally was broader based with the S&P 500 equal weighted increasing 2.93% while the cap weighted S&P 500 rose 89 basis points. All sectors except for Communication Services were positive. Growth names in general fell (Russell 1000 Growth, -0.39%). US Small cap names rose significantly during the week (+6.01%) with little difference between growth and value names. Names in the Russell 2000 Value have still dhad outpaced names in the Russell 2000 Growth on a year-to-date basis (+1.5% versus -2.92%).
According to Refinitiv, aggregate earnings are forecasted to reach all-time highs in Q2 2024. Current estimates expect earnings to grow by 10.1% YoY and 4.4% QoQ. While growth expectations have declined by 40 bps overall, on a sector basis there is some dispersion. Energy saw a large downgrade of 450 bps followed closely by Materials at 300 bps, while the IT sector was upgraded by 150 bps. The Mag-7 continues to have an impact on aggregate earnings growth, boasting an average earnings growth rate of 29.8% while the broader S&P 500 index is expected to see earnings growth decline by 6.6%.
The US consumer price index fell in June marking the first decline in four years led by declining gasoline prices and moderating rents. The index dropped 0.1% in the month, the first drop since May 2020. Gasoline declined 3.8% and shelter costs, which includes rents, increased only 0.2% after rising 0.4% in May. Food prices rose 0.2% after rising 0.1% in May and grocery stores saw increases in dairy products, meat, fish and eggs and declines in fruits, vegetables and cereals. Retailers like Walmart and target have cut prices on their goods as well. Fed Chair Jerome Powell has acknowledged the improving trend in declining prices but stated he was not yet ready to declare inflation had been completely beaten and would need more strong data to pose a case for rate cuts. Some economists suggested this shows the Fed has shifted its focus on the labor market and could lower rates even if inflation remains above its 2% target. Markets say an 85% chance of a rate cut at the September meeting versus a 70% chance seen before the report. Initial claims on Thursday showed unemployment benefits fell 17,000 to 222,000 for the week ending July 6th which is the lowest level since late May.
When rates began to rise two years ago, many investors expected that floating rate debt would be heavily impacted. This has not been the case; lower rated corporate loans have outperformed IG bonds and are now seeing inflows for the first time since 2021. Retail investors of dumped $12.2B into mutual and exchange traded funds focused on these assets. In 2022 and 2023, low rated corporate loans saw outflows of $27B combined. This new source of interest in the space has pushed companies such as Peloton and United Natural Foods to refinance and issue new loan sales. Overall, low rated businesses have issued $736B of loans as of June 30th, up from $200B the previous year.
On Tuesday, Chairman of the US Fed, Jerome Powell testified before the House Financial Services Committee noting that rates currently are not intensely restrictive but slightly restrictive, and over time will decline to rates that are neutral, a rate that neither stimulates or restricts economic growth. As we have seen in the past several quarters, the market and the fed are not necessarily aligned in their view of rates and this chart from Bianco Research highlights. To get to the Fed’s current view of neutral would require a significant number of rate cuts, at least nine if only 25 bps. The markets consider the neutral rate to be only slightly less than it is now. Consensus has been wrong for the most part but Powell stated in his testimony that he does not see rates getting to the levels during the pre-crisis period and that neutral, “is going to be an empirical question” leaving the door open to a bit more flexibility.
The Past Week’s notable US data points
The Upcoming Week’s notable US data points
Data Source: Blackrock, Bloomberg, Charles Schwab, CNBC, Goldman Sachs, J.P. Morgan, Morningstar, MarketWatch, Standard & Poor’s, and the Wall Street Journal.
Authors:
Jon Chesshire, Managing Director, Head of Research
Michael McNamara, Analyst
Sam Morris, Analyst