Why the Stock Market Defied the Odds in July (So Far)

Investors have breathed a sigh of relief so far in July as the worst-case scenarios for the economy have not materialized.

The Nasdaq Composite and S&P 500 are up an impressive 7.5% and 4.8%, respectively, so far this month. Shares of meme-stock darlings GameStop and AMC jumped 17% and 14.5%, respectively, as traders embrace the risk backdrop. Even lagging behind 2022, Netflix has seen its stock rise 25% since the start of the month, even after another lackluster earnings report on July 19.

The pros cite several reasons for the summer rally.

“The odds of a deep recession eased last week as weak PMI data confirmed that 1) growth is slowing, 2) pricing pressures are easing,” 22V Research founder Dennis Debusschere explained. in a customer note. “As prices fall, the Fed can afford to be patient with the data. This does NOT mean a political pivot is coming this week, but it does mean the FOMC also doesn’t need to adjust its upward political trajectory. Growth will continue to slow and recession risks remain high, as evidenced by the further collapse of the 10-year to 3-month curve over the past week. But a deep recession should not yet be a base case, and the case for a mild slowdown/recession has improved.”

Debusschere added that “the worst fears about second-quarter earnings have not materialized,” another positive catalyst that markets jumped on.

“We are recording expenses and we are seeing future travel bookings [strong] so i don’t see it [a recession] in my numbers,” Stephen Squeri, CEO of American Express, told Yahoo Finance.

People walk along Wall Street in the rain on July 08, 2021 in New York City. (Photo by Spencer Platt/Getty Images)

Despite the good vibes in the markets so far in July, storm clouds are brewing.

For starters, the Federal Reserve is expected to raise interest rates by 75 basis points later this week. Warmongering comments from Fed Chief Jerome Powell could ensue amid still rising inflation, much to the surprise of a market in rally mode, the pros say.

“We expect some sort of disconnect between the sharply more bullish tone in the markets on the inflation outlook and the stance the Fed will take at the meeting,” Evercore ISI strategist Krisna Guhu warned in a note. to customers. “We believe Powell will take a harsh tone on recent price action and – while acknowledging some more positive forward-looking developments – will pour cold water on the idea that we are on the verge of accumulating clear and convincing that inflation is moderating.”

In addition, this week’s second quarter GDP figures could show that growth has contracted again after a 1.6% decline in GDP in the first quarter. Two quarters of negative growth are usually indicative of a recession, which would run counter to the optimistic tone currently prevailing in the markets.

“I would say all companies, big and small, are more cautious right now,” Goldman Sachs chairman and CEO David Solomon told Yahoo Finance Live. “There is more uncertainty around the economic trajectory of the country. Inflation is a big, big headwind.”

And while corporate earnings weren’t recession-proof, they were barely strong enough to encourage a more sustained rise in stocks. It’s pretty clear that companies are struggling to push through high levels of inflation and are turning to hiring slowdowns and layoffs to protect their profits.

FactSet estimates that 68% of S&P 500 companies reported a positive earnings surprise for the second quarter, below the five-year average of 77%. S&P 500 companies beat estimates by a meager 3.6%, also below the five-year average of 8.8%.

Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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