After a months-long market correction, equities ended the month of July in the green. The S&ampP 500 index and Dow Jones Industrial Average (DJIA) reported the biggest monthly gains in July since November 2020, while the tech-heavy Nasdaq composite index recorded its best July ever. The Nasdaq Composite index is up 11.4% over the past month, while the S&ampP 500 and DJIA registered 8% and 5.6% gains, respectively. 

 

What happened in July? 

A combination of better-than-expected earnings and relatively subdued rate hikes triggered an impressive relief rally last week, allowing indexes to end July with the biggest gains in over a year. 

The red-hot inflation data released earlier this month raised concerns regarding a supersized rate hike of a full percentage point, intensifying the market sell-off. However, the Fed stuck to its 0.75 basis points rate hike, easing the aggressive rate hike concerns.  As the markets were positioned for a more combative rate hike this month, the three-quarter percentage point rate hike came as a surprise to investors. 

This is not all. The better-than-expected earnings reported by the big-tech and other S&ampP 500 companies have restored faith in equities, sparking a spectacular relief rally. Amazon’s (NASDAQ: AMZN) impressive earnings report indicates optimism regarding consumer spending and easing supply chain disruptions. Moreover, Apple’s (NASDAQ: AAPL) earnings in the last quarter also topped expectations, reflecting the resilience of mega-caps. 

Regarding this, Tom Mantione, a managing director with UBS Private Wealth Management, said, “This was a big week of economic data and earnings … earnings so far this season have not been as bad as people anticipated.”

 

What now for investors and the S&ampP 500? 

The markets are poised to open on a bullish note this August. 148 S&ampP 500 companies are gearing up to report their second-quarter earnings next week. Leading health care companies such as Amgen (NASDAQ: AMGN), Gilead Sciences (NASDAQ: GILD), and Eli-Lilly (NYSE: LLY) are slated to release their quarterly earnings. As healthcare companies have fared relatively well throughout this pandemic, investors are somewhat optimistic about their upcoming results. 

However, stock markets could go in either direction next month, as the S&ampP 500 index has a history of underperforming in August. Tech stocks, on the other hand, have fared relatively well in August, as the Nasdaq composite index has increased at an average 0.9% rate since 1995, according to CFRA. 

Sam Stovall, the chief investment strategist at CFRA, recently said, “It’s a month that could go either way because it has among the highest single monthly advances while at the same time among the deepest single monthly decline.” 

 

Are recession woes over? 

While the equity markets bounced back primarily due to strong earnings reports, the macroeconomic data paints a bleak picture. The U.S. GDP declined 0.9% in the second quarter, following a 1.6% annualized decline in the first quarter. Dow Jones consensus estimate indicated a 0.3% gain in the previous quarter. 

The GDP decline for two consecutive quarters has sent a strong recession signal. However, strong labor market and manufacturing levels indicate that the U.S. is not yet in recession. As the Fed takes necessary steps to facilitate a soft landing, analysts expect easing rate hikes in the upcoming months.

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