S&P 500 gains 7% in July as companies report stable earnings with valuations looking attractive

The rate hikes by US Fed are an ongoing process till inflation is under control. But, interest rate increase impacts corporate profitability and it shows up in the results. In a study by Zacks Investment Research, the overall corporate profitability picture emerging from the Q2 earnings season, with a little over a third of S&P 500 results out at this stage, continues to show stability and resilience in key earnings drivers like consumer and business spending.

While this stability and resilience run contrary to worries of an imminent economic slowdown or even a recession, we are starting to see tell-tale signs of emerging weakness in both consumer and business spending, states Zacks.

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 second-quarter US gross domestic product fell an annualized 0.9% after a 1.6% drop in the first three months of the year. But, the data flowing in from the results may not be showing any downturn yet. Zacks reports – “A slowdown has gotten underway, but there is nothing in the earnings data, management commentary, and guidance that would suggest the U.S. economy heading into a major economic downturn.

We will likely need to wait some more, perhaps until the Q3 reporting cycle in October, to get clarity on the question of the revision. That said, we have had some estimate cuts already, though they are nowhere near what would be consistent with a significant economic slowdown, not to mention a recession.”

US stocks are set for their biggest monthly advance in July, since November 2020 on positive earnings and expectations of shallower Federal Reserve monetary tightening. According to JPMorgan Chase & Co. Strategists, currently, US stock market valuations look attractive given low bond yields and the presence of higher quality companies in the S&P 500.