NEI Monthly Market Insights: July 2023

Aug 21, 2023

Growth continues to surprise on the upside

U.S. markets marched into bull market territory in July as economic data continues to show resilience with strong growth and key inflation indicators easing. Positive economic growth and strong labour market triggered a number of upward revisions in economic growth forecasts and even fuels speculation that the economy may avoid a recession. The market has seen a strong rally amid falling inflation, steady economy, strong employment, and better-than-expected Q2 corporate earnings reports. The S&P 500 returned 3.21% in July (USD), bringing its year-to-date returns to 20.64%. Equity markets were up across the board in Europe, Canada, Japan and Emerging Markets. While U.S. 10-year yields ended the month up 12 bps to 3.96%, while the Canadian 10yr rate closed at 3.50%, up 23 bps for the month. Most fixed income markets ended the month lower.

The NEI perspective

Inflation is softening and reaching the lowest levels since the peaking a year ago. In the U.S., Canada and U.K., inflation has surprised to the downside suggesting that the central banks’ policies may be starting to curtail the worst of inflation. Long-term inflation expectations have also returned close to the neutral rate between 2-3%.

Strong corporate earnings are extending the economic expansion with Q2 earnings widely beating consensus estimates. Of the 365 companies that have reported, profitability was also more resilient than expected, with 83% companies beating expectations on earnings, while only 55% companies beating expectations on revenues.

Economic growth remains resilient was U.S. real GDP growth surprises to the upside with the latest quarter-over-quarter growth at 2.4%. Growth momentum also continues to be strong based on the Atlanta Fed’s data predicting 3.9% growth in Q3 2023.

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