Markets “In A Nutshell” for July 17, 2023

Markets “In a Nutshell” for July 17, 2023

Investment Week at a Glance

Stocks finished higher for the week.  The Dow Jones Industrial Average rose 2.30%, the S&P 500 was up 2.40%, and the NASDAQ rose 3.30%. Foreign stocks (MSCI EAFE) were also up, rising 4.7%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 3.82%.  (Data source: Wall Street Journal)

Inflation Continues to Cool

The June CPI report was released last week and came in at 3% as markets rallied on this news and yields fell. It is still expected that the Fed will raise rates this month but the case for further hikes has weakened. Inflation has fallen rather quickly as just a year ago, CPI was 9.1% and inflation fears were at their peak. This marks the 12th straight month of a decline in CPI and a sharp decline compared to last month’s 4%. Core CPI (excluding food & energy) is at 4.8% which continues to be much higher than the Fed’s target but the lowest since October of 2021. Housing continues to be a drag on CPI as it was the largest contributor to core CPI but the June rise in rents was the lowest since the end of 2021. It is expected this trend will continue which will help push core CPI even lower. Overall, the market is very pleased with this inflation report and could help the next rate hike be the last of this cycle.

Earnings Season

Companies have begun reporting earnings for Q2 of 2023 and for the next couple of weeks the market will be paying close attention to the reports. The market will need to see a strong earnings season to back up the recent rally that stocks have had. The largest 7 U.S. companies have seen an average return of 71% in the first half as their forward PE is 37x whereas the rest of the S&P is up 8% and has a forward PE of 19x. This shows that large companies may be a little stretched on a valuation measure but if they are able to beat earnings expectations the market will continue to reward those companies. The spread between the mega-cap companies and the rest of the market is very apparent and may create some opportunities for investors as that gap is very likely to close.

Quiz:

Quiz

What is the average PE ratio of the S&P 500 the last 40 years? (Scroll Down for Answer)

1.    18
2.    20
3.    22
4.    24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answer below.

 

 

Have a Great Week!

 

 

 

 

 

 

 

 

 

Answer:

3.   22.  Over the last 40 years, the average PE ratio of the S&P 500 has been 22. This has increased as between 1900-1980, the average PE ratio was 13. This increase could be attributed to how fast companies can grow now due to the internet and the ability to expand quicker.