Weekly Capital Markets Update

Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 3,962, representing a gain of 2.56%, while the Russell Midcap Index moved -4.01% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 3.59% over the week. As developed, international equity performance and emerging markets were also higher returning 4.43% and 3.01%, respectively. Finally, the 10-year U.S. Treasury yield moved lower, closing the week at 2.75%.

As of the time of this writing, second-quarter earnings season has been in full swing. Among the stocks that represent the S&P 500 index, there have been 104 companies that have reported their Q2 earnings thus far, approximately 20% of the index. 56% of these companies have beaten analyst revenue expectations and 72% are beating on earnings. In aggregate, the average revenue beat has been 1.08% higher than expectations and the average earnings beating by 4.19%. While these “beats” are nothing new to investors in equity markets over the past decade plus of bull market activity, they are surprising given how much attention has been brought recently to the health of the U.S. economy.

On a more sobering note, despite the surprising level of “beats,” earnings growth has been slowing. According to FactSet Earnings Insight, as of July 22, 2022, the blended earnings growth rate for the S&P 500 Index is 4.8%. If 4.8% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q4 2020, which was 4.0%. Looking ahead, for Q3 2022, ten S&P 500 companies have issued negative EPS guidance and one S&P 500 company has issued positive EPS guidance thus far. The relative strength of earnings, employment, and consumer spending are certainly atypical for an economy that will likely meet the technical definition of a recession later this week. As a reminder, many textbooks refer to a technical recession as two consecutive quarters of negative real gross domestic product (GDP) growth. Nominal GDP grew by 6.5% in the 1st quarter of 2022, and inflation-adjusted real GDP fell by 1.6%. Additionally, the current estimate for the second quarter from GDPNow has GDP again declining, this time by approximately 2.0%. If this estimate proves true, it will mark the second consecutive quarter of negative growth in real GDP, meeting the technical definition of a recession. The yield curve also inverted again last week, and the yield curve in the U.S. has inverted before each recession since 1955, with a recession following between six and 24 months, according to a 2018 report by researchers at the San Francisco Federal Reserve.

It is very important for us to note that every recession is different, as this one may certainly prove to be, and that every recovery is also unique. Because of the distinct times we are experiencing, we encourage investors to work with experienced financial professionals to help process all of this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

S&P 500 earnings data from Bloomberg on 7/22/22 before market close. Consumer Price Index and Producer Price Index data is sourced from the U.S. Department of Labor. Equity Market and Fixed Income returns are from JP Morgan as of 7/22/22. Rates and Economic Calendar Data from Bloomberg as of 7/22/22. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.

Definitions

MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.