Weekly Market Update: July 1, 2024

Treasury market yields stabilized near the end of June. Indeed, the rate on the 10-year Treasury note, which is used as a benchmark for setting longer-term rates, hovered around 4.25% after trading at more than 4.60% in late May. The Federal Reserve’s “high for longer” stance on interest rates, which would normally put upward pressure on Treasury yields, was counter balanced by building sentiment on Wall Street that the data-dependent central bank will be more dovish in the latter half of this year. This stance gained steam following more-benign May readings on consumer and producer price growth.

The Federal Reserve must guard against being too restrictive and slowing economic growth too much. There are parts of the economy that indicate signs of weakening output. On point, residential construction activity fell sharply in May and retail sales growth was weaker than forecast at +0.1%. The latter report also included a downward revision of the April figure, to -0.2%. Signs of spending fatigue in the consumer sector are evident, as inflation is still running above the Fed’s comfort level and credit card debt continues to balloon.

Wall Street’s attention will turn to the corporate world, as second-quarter earnings season will soon commence. Initially, the results and commentary from the big money center banks, including JPMorgan Chase, will provide a closer look on how the U.S. economy is faring and the health of the consumer sector. It should be noted that U.S. credit card debt continues to break records at a time when financing terms are as high as they have been in recent memory. This is eating away at consumers’ spending budgets.

Corporate America continues to see profits expand. The Wall Street consensus is estimating high-single-digit earnings growth for S&P 500 companies in the second quarter. This would mark the highest year-over-year growth since the first quarter of 2022 and might be needed to justify the Index’s high price-to-earnings multiple, which exceeds both the five and 10 year averages.

Conclusion: With Wall Street’s aforementioned dovish stance on future monetary policy and solid second-quarter earnings results likely on tap, further equity market gains may be in the cards. We continue to favor a portfolio headed by high-quality stocks. 

Source: ValueLine.com