US stocks spring higher to close out best month since 2020

US stocks have rebounded from a tough first half of the year as easing expectations for interest rate rises and upbeat earnings from several big tech and energy companies delivered the best month of performance since 2020.

The S&P 500 index rose 9.1 per cent in July, its biggest monthly gain since November 2020. The blue-chip stock gauge was bolstered by better than expected earnings, but also by gloomy economic data which convinced investors the Federal Reserve may have to slow its aggressive pace of monetary tightening.

The tech-heavy Nasdaq Composite index has fared even better: its monthly gain of 12.3 per cent was the most since April 2020, when the Fed stepped in to stabilize 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 .

This month, 86 per cent of stocks in the S&P 500 have risen, FactSet data show.

Shares in Amazon ended Friday 10.4 per cent higher — leaving them up 27.1 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 the energy sector, US oil supermajors ExxonMobil and Chevron on Friday reported record quarterly profits thanks to surging oil and gas prices.

“Second-quarter earnings came in better than expected, so there was some of that contributing to outperformance in July,” said Jack Ablin, chief investment officer at Cresset Capital.

Ablin noted, however, that the primary driver of stocks this month has been falling interest rate expectations. Futures pricing on Friday implied the Fed’s main funds rate would peak at 3.3 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.

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 rose 6.9 per cent this month. Europe’s Stoxx 600 has gained about 8 per cent.

The Fed, the world’s most 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.

But there has been little evidence that inflation, which continues to run at four-decade highs, is slowing. And Fed chair Jay Powell at the conclusion of the bank’s two-day meeting on Wednesday, at which interest rates were raised 0.75 percentage points for the second consecutive month, reiterated his commitment to a 2 per cent inflation target.

Strategists at Barclays also 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.

“Every bear market has strong rallies within it,” said Lou Brien, a strategist at DRW Trading Group.

“We’re in one of those tricky periods here where it’s not clear if we’ve seen the low, or if this is a rally within a larger bear market.”

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