July turned out to be the best month for Wall Street’s stock investors since November 2020, a rally fueled by better than expected financial results from some of America’s biggest companies and bets that the Federal Reserve could curtail its policy of constraining the economy sooner than previously expected.
The S&P 500 rose 1.4 percent Friday, taking its gain for July to 9.1 percent, its best month since the first announcements about an effective Covid-19 vaccine helped send stocks nearly 11 percent higher in November 2020.
It’s a sharp change of tone after a particularly difficult stretch. Investor sentiment was buoyed by signs that some of America’s biggest companies are managing to weather economic headwinds, including slowing growth and rising interest rates. This week, marquee tech names like Apple, Microsoft, Amazon and Alphabet — whose size and performance drove the stock market to new highs in recent years — reported results that relieved investors. Shares of all four were higher for the week and the month.
At the same time, investors appeared to take solace from the latest Federal Reserve meeting, interpreting the central bank to be willing to slow its pace of interest rate increases as the economy begins to cool. Rising interest rates increase costs for companies and weigh on profits, making investors attuned to signals of an easing in the Fed’s current policy.
“Despite pockets of weakness, earnings have been fine,” said Alex Atanasiu, a portfolio manager at Glenmede Investment Management. He added that despite the Fed raising interest rates on Wednesday, longer-dated Treasury yields, which help set borrowing costs worldwide, have fallen along with expectations for further interest rate increases, “and that bolsters equities.”
What the Fed’s Rate Increases Mean for You
A toll on borrowers. The Federal Reserve has been raising the federal funds rate, its key interest rate, as it tries to rein in inflation. By raising the rate, which is what banks charge one another for overnight loans, the Fed sets off a ripple effect. Whether directly or indirectly, a number of borrowing costs for consumers go up.
Consumer loans. Changes in credit card rates will closely track the Fed’s moves, so consumers can expect to pay more on any revolving debt. Car loan rates are expected to rise, too. Private student loan borrowers should also expect to pay more.
Mortgages. Mortgage rates don’t move in lock step with the federal funds rate, but track the yield on the 10-year Treasury bond, which is influenced by inflation and how investors expect the Fed to react to rising prices. Rates on 30-year fixed-rate mortgages have climbed above 5 percent this year, according to Freddie Mac, up from closer to 3 percent for most of 2021.
Banks. An increase in the Fed benchmark rate often means banks will pay more interest on deposits. Larger banks are less likely to pay consumers more, and online banks have already started raising some of their rates.
Of the 278 companies in the S&P 500 to report earnings so far, 209 have beaten analyst expectations, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
Amazon’s share price soared by more than 10 percent on Friday after its earnings report on Thursday, adding roughly $140 billion to the company’s market valuation. Amazon is among the best performing stocks over the past month, up over 27 percent. Because of its roughly $1.4 trillion market value and the way the S&P 500 index is weighted, that move had a big 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 effect on the S&P 500 this month. Apple’s shares jumped almost 19 percent in July.
There were bright spots elsewhere as well. European stocks rose nearly 8 percent for the month, despite concerns over Italy’s economic and political health and rising fears of a natural gas shortage heading into winter. In corporate bond markets, the debt of riskier, “junk”-rated companies returned over 5 percent, according to an index run by Bloomberg, which had its best one-month performance since October 2011.
Yet despite the strong performance, some investors remain wary, cautioning that the recent rally could unwind itself just as quickly.
“I think we are going to go through a tough time in the second half of the year, where the economic data continues to show growth eroding and inflation might not come down as fast as people are hoping,” said David Donabedian, chief investment officer of CIBC’s U.S. private wealth business.
The move higher is a reflection that the current round of updates from corporate America are not as bad as feared, which is different than those results being good. Investors pushed the S&P 500 down over 8 percent in June, ahead of the current crop of earnings results, and the index remains around 14 percent below its peak in January.
Some investors also said that there is a willingness to keep buying stocks while inflation is so high because other, safer assets do not offer the returns that allow them to defend against the eroding effect of rising prices.
“I am not as sanguine as the market seems to be,” said Lauren Goodwin, an economist at New York Life Investments. “But running for the hills when inflation is so high is just a drag on returns. We have to stay invested.”