July 2023 monthly market insights
Data and opinions as of June 30, 2023
Markets continue to rally through June
Equity markets had another positive month as the S&P 500 was up 6% in June, bringing year-to-date returns to 14.5%, while the Nasdaq is officially back in bull market territory, up 36.7% year-to-date. Equity markets were up across the board in Europe, Canada, Japan, and Emerging Markets while China was down for the month. Better-than-expected economic conditions in the first half of 2023 has also contributed to this dynamic. The U.S. Economic Surprise Index has surged, indicating that economic data releases have been coming in above consensus forecasts. The previous concerns about an impending recession seem to have diminished, or at least expectations for a recession have been pushed out further to a later date. Fixed income markets ended the month lower as yields surged on strong economic data, raising expectations that central banks will need to stay hawkish for longer.
The NEI perspective
U.S. market rallied past the trading range ceiling of 4200 that it had previously and entered a technical bull market after returning over 24% since hitting a low in October. While the performance of AI exposed mega-cap technology companies has led the markets, the rally has recently broadened.
Market strength buoys investment sentiment as market sentiment has shifted from having more investors in the bearish camp, to having the majority of investors turning bullish over the past few months. In June, bullish sentiment was at its highest level since November 2021.
How sustainable is this rally? Excess savings, a tight labour market, reasonable valuations (outside of the mega cap technology companies) and the low bar set for earnings expectations indicate that the market may continue to rally in the near term.
From NEI’s Monthly Market Monitor for June
Canada: MSCI Canada; U.S.: MSCI USA; International markets: MSCI EAFE; Emerging markets: MSCI Emerging Markets. Source: Morningstar Direct
Canada investment grade: Bloomberg Barclays Canada Aggregate; Global investment grade: Bloomberg Barclays Global Aggregate; U.S. high yield:Bloomberg Barclays U.S. High Yield. Source: Morningstar Direct.
U.S market starting to see improvement in breadth
The S&P 500 Index broke out of its 3800-4200 trading range and entered a technical bull market after returning over 24% since hitting a low in October. While the performance of AI exposed mega-cap technology companies has led the markets, the rally has recently broadened with the equal-weighted index outperforming the market-weighted index in June, pointing to an improvement in breadth and potential for continued upside.
Source: Source: Bloomberg data as of May 31, 2023
As recently as late May, the equal weighted index was flat on a year-to-date (YTD) performance basis.
Source: Bloomberg data as of June 30, 2023
Market strength buoys investment sentiment
Over the course of the past few months, market sentiment has shifted from having more investors in the bearish camp, to having the majority of investors turning bullish. In June, bullish sentiment was at its highest level since November 2021. In other words, this is the most positive investors have been on the markets in almost two years. This can also be seen in investor flows. After several months of outflows, investors moved off of the sidelines and invested into equities in June.
Source: Bloomberg data as of June 30, 2023
Earnings expectations are overly bearish
The market is expecting companies to report a 9% year-over-year decline in the upcoming Q2 earnings season in July, driven by flat sales growth and margin compression. We believe this is a relatively low bar and companies should be able to beat consensus which provides support for equity upside. The key is the companies’ go forward guidance over the next 12 to 18 months in earnings trajectory. Analysts have been consistently revising earnings estimates downward and they may have reached bottom for this year and next year’s estimates. An upward revision in forward earnings estimates would provide the equity markets with a boost in sentiment.
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