US stocks enjoy July rebound after grim first half of 2022

US stocks have rebounded from a tough first half of 2022 as easing interest rate rise expectations and upbeat earnings this month from big tech companies fuelled a broad rally.

The blue-chip S&P 500 index was on course to post a 9 per cent gain in July, its best month since November 2020, bolstered by better than expected tech earnings this week that signalled the dominant US tech sector could withstand an economic slowdown. FactSet data show that 86 per cent of the stocks listed on the index have risen since the end of June.

The tech-heavy Nasdaq Composite has fared even better, and is on track for a 12 per cent gain this month, its best since April 2020, when the Federal Reserve stepped in to stabilise markets following the meltdown sparked by the global spread of Covid-19.

The strong performance in July is a contrast to the first six months of the year, when the S&P fell 21 per cent and the Nasdaq dropped 29 per cent, the worst first-half performance for the $44tn US equity market in more than 50 years.

“The tech earnings season has been a bit better than the market feared,” said Baylee Wakefield, multi-asset fund manager at Aviva Investors.

“Investors are also betting that much of the negative [economic] news has been priced in, that the Federal Reserve could become less aggressive in tightening monetary policy, and there’s enthusiasm in equity markets for slower inflation and fewer rate hikes.”

Shares in Amazon were up 12 per cent by mid-afternoon trade on Friday in New York — leaving them up 29 per cent in July — after the ecommerce group beat analysts’ quarterly revenue forecasts and gave an upbeat outlook for the rest of the year because of the strong performance of its cloud computing business.

Microsoft, Apple and Google parent Alphabet all also issued more confident outlooks than investors had expected, lifting a US tech sector that has an outsized weighting in global markets.

In a sign of how investor sentiment is brightening, US equity funds tracked by EPFR recorded their largest inflow in six weeks this week, picking up $9.5bn of net new investments, according to Bank of America.

The gains have not been limited to the United States. The FTSE All-World index of developed and emerging market shares is on track for a 7 increase this month. Europe’s Stoxx 600 has gained about 8 per cent.

Column chart of FTSE All-World index, monthly % change showing Global stocks heading for best month since November 2020

The Fed, the world’s most influential central bank, has sharply lifted interest rates in the first seven months of this year. On Thursday, however, data showed the US economy had contracted for a second consecutive quarter, sparking hopes that the worst inflationary cycle for four decades would moderate and that the Fed may slow its policy tightening.

“Investors have been more worried about inflation and what that does to interest rates than they have about anything else,” said Rebecca Chesworth, senior equities strategist at State Street’s SPDR ETF business.

“So they’ve taken any sign that inflation will reduce and turned bullish on that.”

Futures pricing on Friday implied the Fed’s main funds rate would peak at 3.29 per cent next February from a range of 2.25 to 2.5 per cent at present. In mid-June, such predictions ran as high as 3.9 per cent.

But strategists at Barclays warned that July’s strong performance for stocks and bonds “could be brought back down to earth” by inflation remaining elevated as a result of Russia’s invasion of Ukraine.

“The fundamental outlook remains clouded by the dramatic slowing in the economy and high energy prices,” they said in a note to clients. “It feels optimistic to believe the Fed can soon reverse course.”

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