Wall St Week Ahead-After first-half rally, stocks' July winning streak on the line

Clara Resources Australia

02/07/2023 14:00

(Repeats SCHEDULED COLUMN originally published June 30, no
changes)
    By Lewis Krauskopf
       NEW YORK, June 30 (Reuters) - A U.S. stocks rally is
cruising into a month that has proven strong in recent years,
though equities must navigate employment data and an earnings
season that could be precarious, with the Federal Reserve bent
on raising U.S. interest rates. 
    The S&P 500 defied recession fears and a U.S. banking crisis
to notch a 15.9% gain in the first half. The Nasdaq Composite
 .IXIC  powered ahead 31.7% for its biggest first-half increase
in four decades. 
    Investors betting the upward trend will continue over the
next few weeks have recent history on their side. The S&P 500
 .SPX  has posted a positive return in eight consecutive Julys,
and the tech-heavy Nasdaq 100 index  .NDX  has climbed in July
for 15 straight years. 
    "We have had a pretty resilient market in the first half of
this year,” said Mona Mahajan, senior investment strategist at
Edward Jones. “The market needs one big question answered, and
that is what does the economy look like in the back half of the
year.”
    Several indicators show growing optimism about equities.
Positive sentiment in the American Association of Individual
Investors survey has come in above its historical average for
four straight weeks, while positioning measures tracked by banks
have shown investors recently increasing their exposure to
stocks. 
    The Cboe Volatility Index  .VIX , which measures investor
demand for protection against stock swings, recently hit its
lowest level since early 2020. 
    At the same time, July brings its share of potentially
market-moving events. First up is next Friday’s U.S. employment
report, which will give investors a snapshot of how the economy
is faring after 500 basis points of rate hikes from the Fed
since last year, its most aggressive tightening in decades. 
    Signs of continued solid job growth could reinforce a view
that has helped boost markets this year: that the U.S. economy
can avoid a severe recession despite the Fed’s tightening. 
    "The labor market is probably going to end up proving to be
the big catalyst for what may happen market-wise and also
monetary policy wise," said Omar Aguilar, chief executive
officer and chief investment officer of Schwab Asset Management.
    Second-quarter corporate results will kick off the following
week. S&P 500 companies are expected to post an overall drop in
earnings of 5.7% from the year-earlier period, according to
Refinitiv IBES.
    Investors will focus on results from seven tech and other
megacap companies, including Apple  AAPL.O , Microsoft  MSFT.O 
and Nvidia  NVDA.O , whose outsized gains have driven the S&P
500's rise this year.
    “To the degree the Magnificent Seven has been carrying
this..., those are the multiples most likely to get hit with any
sort of warning, any sort of negative announcement," said John
Lynch, chief investment officer for Comerica Wealth Management.
    The consumer price index report arrives on July 12, a
crucial read on inflation before the Fed's July 26 policy
decision. The U.S. central bank held rates steady in June and
has signaled two more increases are coming this year, including
one widely expected in July. 
    While stocks have so far taken policymakers’ projections of
higher rates in stride, that could change if bond yields
continue to rise. Benchmark yields recently hit three-month
highs, with the 10-year U.S. Treasury yield last around 3.8%,
well over double where it stood at the end of 2021.
    Rising yields generally dull the allure of stocks compared
to bonds, but in recent months equity valuations have still
climbed.
        The S&P 500 is trading at 19.1 times forward earnings
estimates, well above its historic average P/E of 15.6 times,
according to Refinitiv Datastream.
    "At some point, this move in interest rates has got to have
some consequences for the markets," Matt Maley, chief market
strategist at Miller Tabak, said in a note on Friday.
        Some doubt the rally's staying power. A Deutsche Bank
survey found more than three-quarters of investors believe the
next 10% move in the S&P 500 will be down, compared to 24% who
projected that in March.
    Those doubts could stem from concern about economic fallout
from rate hikes.
    Analysts at UBS Global Wealth Management said in a recent
note the likelihood of a recession hinges most on monetary
policy becoming more restrictive, an eventuality stocks are not
priced for. 
    "With stocks already priced for the near perfection of a
soft landing, we see better risk-reward in high-quality bonds
over equities," the UBS analysts wrote.

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Strong first half for U.S. stocks    https://tmsnrt.rs/3NB6LpW
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 (Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and
David Gregorio)
 ((lewis.krauskopf@thomsonreuters.com; 646-223-6082; Reuters
Messaging: lewis.krauskopf.thomsonreuters.com@reuters.net,
Twitter: @LKrauskopf))
 
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