Investors brace for pivotal July after dismal first half

By Lewis Krauskopf

NEW YORK (Reuters) – The U.S. inventory market is reeling from its worst first half of any yr since 1970, with buyers girding for a collection of potential flashpoints in July which will set Wall Avenue’s course for the approaching months.

Second-quarter company earnings, hotly anticipated U.S. inflation knowledge and the Federal Reserve’s financial coverage assembly are amongst doubtlessly pivotal occasions after the S&P 500 fell 20.6% within the preliminary six months of 2022.

For now, the temper on Wall Avenue is grim. Bonds, which buyers rely on to offset inventory declines, have tumbled alongside equities, with the ICE BofA Treasury Index on tempo for its worst yr within the index’s historical past. Some 90% of respondents in a current Deutsche Financial institution survey anticipated a U.S. recession by the top of 2023.

The important thing issue behind the turmoil in markets is the Fed, which has been quickly tightening financial coverage to struggle the best inflation in a long time following nearly two years of emergency measures that helped buoy shares and stoke development.

“We might actually use simply barely much less unhealthy information in July,” mentioned Eric Kuby, chief funding officer at North Star Funding Administration. “Hopefully, it might flip the again half of 2022 in a extra favorable mild.”

Historical past, nevertheless, “doesn’t supply very encouraging information” for these hoping the grim first half can be adopted by a bounce within the latter half the yr, wrote CFRA chief funding strategist Sam Stovall.

Of the ten worst begins to the yr for the S&P 500 since World Warfare Two, the index has posted features within the second six months of the yr solely half the time, rising a mean of two.3%, Stovall mentioned in a current report.

On the info entrance, reviews on employment and inflation will give buyers a snapshot of the economic system after 150 foundation factors of charge will increase already delivered by the Fed.

A disappointing jobs report subsequent Friday might exacerbate issues of a possible recession. The next week brings knowledge on U.S. client costs, after a hotter-than-expected report final month triggered a selloff in shares and prompted the Fed to ship a hefty 75 foundation level charge enhance in June.

There was current proof of waning development. Knowledge on Friday confirmed U.S. manufacturing exercise falling to a two-year low in June, following a report earlier within the week that confirmed that June client confidence at its lowest in 16 months.

“The important thing query is, what’s going to roll over first: will or not it’s inflation or development?” mentioned Angelo Kourkafas, an funding strategist at Edward Jones.

Second-quarter earnings begin arriving in drive the week of July 11, indicating whether or not corporations can maintain residing as much as estimates regardless of surging inflation and development worries.

Analysts count on quarterly earnings to develop by 5.6% from a yr in the past, revised down barely from early April’s estimate for six.8% development, in response to Refinitiv IBES.

If corporations “can simply match or possibly hurdle over decrease expectations, I believe that can be a constructive tailwind for inventory costs,” mentioned Anthony Saglimbene, world market strategist at Ameriprise.

Strategists at Goldman Sachs are much less sanguine, warning that consensus margin forecasts recommend earnings estimates are “doubtless too optimistic” and margins for the median S&P 500 firm will doubtless decline subsequent yr “whether or not or not the economic system falls into recession.”

“Whereas buyers are targeted on the potential of recession, the fairness market doesn’t seem like totally reflecting the draw back dangers to earnings,” Goldman mentioned in a observe this week.

July’s knowledge ought to issue into the Fed’s actions at its subsequent assembly on July 26-27, when it’s broadly anticipated to boost charges by one other 75 foundation factors.

Some buyers predict slowing development will immediate the Fed to ultimately soften its stance prior to policymakers challenge. However analysts at Capital Economics disagreed, writing on Friday that such a speedy reversal could be inconsistent with the central financial institution’s habits in current a long time.

In consequence, “we don’t count on US equities and Treasuries to fare effectively within the second half,” they mentioned.

(Reporting by Lewis Krauskopf; Enhancing by Ira Iosebashvili and David Gregorio)