Markets rebound strongly in July

The rebound in equities is a reflection that the current round of corporate updates is not as bad as feared

July turned out to be the best month for equity investors since November 2020, reversing part of the double-digit losses experienced in the first half of the year.  The S&P 500 gained 9.1 percent during the month, outperforming the Euro Stoxx 50 which rallied by 7.5 percent over the same period.  

That is a sharp change of tone after a particularly difficult stretch, in which the two regional benchmarks lost just over 20 percent each during the first half of 2022.  The comeback rally was partly fueled by better than expected financial results by some of the world’s biggest companies which goes to show that corporates are managing to weather the economic headwinds, including slowing growth and rising interest rates, better than what most had feared.  

In effect, out of the 278 companies in the S&P 500 to report earnings so far, roughly 60 per cent have topped revenue forecasts and approximately 74 percent have bested profit projections, according to data compiled by Bloomberg.  Prior to that, investors had pushed the S&P 500 down over 8 percent in June, ahead of the current round of earnings results, as the index remains around 14 percent below its peak in January.

There were bright spots elsewhere as well.  European equities also rallied strongly despite concerns over Italy’s economic and political health and rising fears of a natural gas shortage heading into the winter.  In corporate bond markets, the debt of riskier companies returned over 5 percent, according to an index run by Bloomberg, which had its best one-month performance since October 2011.  

At the same time, investors appeared to take comfort 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 cools.  Rising interest rates increase costs for companies and weigh on profits.  However, recent developments have seen the ten-year Treasury yield, which help set borrowing costs worldwide, stabilise consistently below the 3 percent mark after spiking to 3.4 percent levels earlier in the year.  That in itself has bolstered equity performance as it reduced the burden of a higher discount rate on future profits.  It also resulted in a recovering in investment grade bonds which were also under significant pressure from rising interest rate expectations earlier this year.

In terms of sector performance, cyclicals clearly outperformed defensives as investors took advantage of low valuations, partly reversing the trend so far this year.  Among these, consumer discretionary and technology companies top the month’s performance with gains of over 10 percent.  At the other end of the spectrum, consumer staples and financials underperformed but still managed to produce a positive performance for the month.

Going forward it will be interesting to see whether July has marked the start of a much-awaited recovery in financial markets or it would prove to be a mere bear market bounce.  We remain optimistic that after one of the worse starts for the year for equity investors, the tide may be turning, as the fundamental backdrop has somewhat improved in recent weeks even though it pays to be cautious and only take gradual steps at this point in the cycle.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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