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Midway through 2021, the US stock market is at full speed. The S&P 500 has just climbed for a fifth consecutive month, reaching its last all-time high to close in June. The benchmark index is up 14.4% year-to-date while the Dow Jones Industrial Average and Nasdaq Composite are both up more than 12% each.
While the Wall Street bulls may be hoping for a second half about as good as the first, the bears are waiting for a catalyst to finally push the S&P 500 down after surging nearly 40% in the past 12 months. And in the midst of that bear-bull debate are strategists who currently predict that the S&P 500 will end the year just 0.6% higher than in June, according to the median estimate of a poll conducted by CNBC at mid-June. .
Market watchers will be paying close attention to the upcoming second quarter t earnings season, which begins in mid-July, as well as whether inflation is rising even faster and what the Federal Reserve is saying. that she will do about it.
Compared to just a month ago, however, there is more reason to be “cautiously optimistic” about the stock market in the near term, says Elizabeth Evans, Chartered Financial Planner (CFP) and Managing Partner of Evans May Wealth.
“All indicators lead us to believe that there is another leg in the market,” she said.
Here’s what professional investors will be watching for in July and what it could mean for your portfolio.
Surprises in the second quarter earnings season
The multi-week period in which publicly traded companies release their financial results – in this case, for the second quarter – begins in the middle of the month with financial companies leading the way. Wall Street is currently expecting the best quarter of earnings growth since 2009.
Analysts estimate that companies in the S&P 500 could report profits more than 62% higher than the same quarter in 2020. This could even be conservative since this estimate of the rate of earnings growth has increased in recent months with the reopening of the economy. , notes Michael Sheldon, Executive Director and Chief Investment Officer at RDM Financial Group. During earnings season, he says the following two questions will be a priority for professional investors:
- Was the second quarter the peak of corporate profits?
- Will subsequent quarters see a similar improvement in earnings growth estimates, such as the second quarter?
The second quarter is already breaking records, based on the number of S&P 500 companies (current number: 66) that have posted positive earnings forecasts (meaning the company’s estimate is higher than analysts plan). If this trend continues, it will be “a very positive indicator” for the stock market, notes Evans. “We are starting to see that expectations have finally caught up with reality.
Even before the next earnings season is over, investors will look to the third quarter and beyond to assess whether companies can continue to surprise Wall Street in a good way, she adds.
More information on inflation and economic growth
A New Month offers a new round of economic reports, so mark your calendar for the following closely watched posts:
- July 2: The June employment report will detail the number of employees added to the payroll as well as the unemployment rate.
- July 7: Data from the monthly JOLTS report (short for: summary of job postings and workforce turnover) is lagging behind, but job posting data for May could be a leading indicator of future hiring plans.
- July 13: The Consumer Price Index (CPI) report for June is due and is one of the main measures of inflation.
- July 29: The advance estimate (the first of three) of gross domestic product (GDP) for the second quarter is expected to be released.
- July 30: The June personal consumption expenditure (PCE) report is scheduled for release. This is the Federal Reserve’s preferred measure of inflation.
Concern over the prospect of rising inflation caused a lot of angst among market participants earlier in the year, but now that it’s here, those worries have allayed some. Still, inflation remains a priority and investors will continue to monitor whether it is transient – as the Federal Reserve has suggested – or whether it could be sustainable, notes Evans.
Speaking of the Federal Reserve, policymakers meet at the end of the month to discuss monetary policy. Profit season will also offer a glimpse, notes Sheldon.
“Investors would love to hear what CEOs and CFOs of companies have to say about the outlook for inflation, their comments on their ability to get enough workers and their overall outlook for the economy,” he said. declared.
So far, the economic data and corporate earnings all seem to be “heading in the right direction,” which is why Evans continues to be bullish on the stock market.
Watch for rising interest rates
The yield on the 10-year Treasury bill climbed to 1.72% in April and has hovered around 1.5% more recently. While yields have risen significantly from the lows of the pandemic era, many of Evans’ clients are still not so fond of bonds at this time, given the relatively low yields compared to a hot stock market.
Still, the prospect of greater volatility to come in the stock market is a good reason not to abandon bonds altogether, she says. And even in the best-case scenario – as the stock market continues to rise – bonds provide ballast to stocks in a portfolio, she adds.
Thanks to the rise in inflation, the yield on the benchmark 10-year Treasury bill could be on the rise in the second half of the year. Wells Fargo predicts the rate could reach 2.2% by the end of 2021 while Goldman Sachs has a target of 1.9%.
Expect interest rates to be the main focus in July, Sheldon notes. “Rising rates would likely signal increased confidence in the outlook for global economic growth, while lower rates could signal some concerns about the economy’s outlook for the future,” he said.
How to invest in July
The middle of the year is a good time to reassess what has happened in the market so far and where it might be heading. So much attention has been paid to rotating growth stocks to value stocks, but whether this trend continues depends on factors that are difficult to predict such as interest rates, inflation expectations and the outlook for the future. economic growth, notes Sheldon.
“Because of this uncertainty, we say why not have some exposure to both growth and value? ” he says. “We believe investors should take a barbell approach with exposure to both growth and value as the economy moves from the start of the cycle to the middle of the cycle.”
Likewise, Evans says that focusing too much on rotating growth to value could cause investors to overlook attractive investment opportunities. Rather, she and her colleagues are “very selective” about stocks, focusing on high-quality companies that have a competitive advantage and sustainable business models, whether viewed as growth or value stocks.
“We think the second half of the year will be a stock picking market,” Evans says.