Stocks in the United States and Europe had their biggest monthly increase since November 2020 on upbeat earnings and expectations of slower Federal Reserve monetary tightening. Cheaper valuation after a downbeat first-half also aided equities.
The S&P 500, the Dow Jones, the Nasdaq Composite and the Russell 2000 added 8%, 5.6%, 11.4% and 9.1%, respectively in the past one month (as of Jul 29, 2022). Some earnings came in upbeat to close out the month. Against this backdrop, investors may be interested to know what lies ahead for Wall Street for the month of August. Let’s delve a little deeper.
Per Earnings Trends issued on Jul 27, 2022, for the 181 S&P 500 companies that have reported Q2 results, total earnings are down 4.0% from the year-earlier period on 8.2% higher revenues, with 74.6% beating EPS estimates and 65.2% beating revenue estimates. The drag from the Finance sector makes up most of the earnings decline. In a word, despite several headwinds, earnings picture remains decent and we may see such decent trend in August too. WisdomTree U.S. Large-Cap Fund EPS should thus be closely watched.
Recessionary Cues in the U.S. Economy
The American economy shrank an annualized 0.9% on quarter in the second quarter of 2022, after a 1.6% decline in Q1 and technically entering a recession, the advance estimate showed. No wonder, all eyes will be glued to the economic data points so that investors can measure the prognosis of the U.S. economy.
On a bright note, net trade made a positive contribution for the first time in two years in the second quarter, as exports grew 18%, thanks to industrial supplies, materials and travel. Industrial Select Sector SPDR ETF XLI, a Zacks Rank #2 (Buy), should thus be closely followed in August.
Can Inflation Soften?
In the second quarter, PCE slowed and grew just 1%. This is a positive on the inflation reading front though consumer price inflation has been hovering around a 41-year high level. With 225 bps of Fed rate hikes so far this year, inflation should cool down a bit now. So, investors’ eyes will be on the inflation reading in August. Such a scenario puts focus on the likes of Amplify Inflation Fighter ETF IWIN.
Where Will Greenback Head if the Fed Rate Hikes Slow?
The greenback has had a great first half with theInvesco DB US Dollar Index Bullish Fund UUP gaining more than 10% so far this year (as of Jul 29, 2022). But the gains moderated in July as UUP gained only 1.2%. With the cues of slower Fed rate hikes going forward and the ECB policy tightening in place, we may see moderation in the strength of the U.S. dollar in the coming days.
Can Oil Turn Around After Downbeat July?
United States Oil Fund, LP USO had a slightly downbeat July as the fund lost 2.9% past month (as of Jul 29, 2022). But oil prices rallied to close out July as hopes about OPEC+ supply boost faded, per Reuters. Analysts said it would be tough for OPEC+ to increase supply as many producers are already struggling to meet output quotas. Stronger stock markets as well as a weaker greenback supported commodities like oil. If the situation persists, we may see a surge in oil prices.
European Market Under Watch After Hawkish ECB & Strong Earnings
In line with many central banks, the European Central Bank (ECB) has raised interest rates in July by 50 bps to 0.5% (more than expected) — its first increase for more than a decade —to prevent high inflation. Consumer prices rose at a record 8.6% year over year in June. The ECB indicated that more hikes are possible as soon as its September 8 meeting. So, movement in Invesco CurrencyShares Euro Currency Trust FXE should be under watch (read: ECB Hikes Rates: ETFs to Win/Lose).
As the ECB hiked rates fatter-than-expected, the yield curve will likely steepen ahead. This is especially true given that the economic growth forecast has been decent despite the Russia-Ukraine war, energy prices rally and COVID-19 fears. iShares MSCI Europe Financials ETF EUFN thus may gain ahead. This is especially true given some European banking earnings came in upbeat in the recent releases.
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Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports
United States Oil ETF (USO): ETF Research Reports
iShares MSCI Europe Financials ETF (EUFN): ETF Research Reports
WisdomTree U.S. LargeCap ETF (EPS): ETF Research Reports
Amplify Inflation Fighter ETF (IWIN): ETF Research Reports
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