The S&P 500 closed 2% lower last week and is more than 5% lower since the end of July, even as next 12-months earnings per share expectations have continued to rise to $236 from $225 in March. What happened? Higher interest rates.
- Nearly 80% of S&P 500 companies reported earnings higher than analysts’ forecasts, the highest rate of beats since Q3 2021. Notably, retailers Target and Walmart closed out the week beating earnings expectation.
- While top-line revenue growth was somewhat underwhelming, companies have been able to preserve and, in some cases, even fatten profit margins as the price pressures companies face from suppliers have fallen a lot faster than the prices they are charging customers.
- While minutes of the Fed’s July meeting released last week offered a positive sense of abating inflation pressures, most Fed officials “continued to see significant upside risks to inflation, which could require further tightening of monetary policy,” with inflation still above its 2% target and the job market still tight.
- Fed members also indicated that everything is data dependent, so Fed Chair Powell’s comments this week at the annual Jackson Hole Fed conference will provide a new read on how the Fed sees the stronger economic growth and labor market data since its July meeting.
- The impact on interest rates was almost immediate: the bond sell-off pushed the yield on the U.S. 10-year Treasury to 4.3%, the highest in 15 years, and average 30-year mortgage rates rose to 7.6%, the highest in more than 20 years.
China’s efforts to invigorate domestic demand to be the engine of economic growth in place of exports is failing.
- China’s economy has stalled. There is no apparent government support for the economy, investor sentiment is declining, China’s government bond yields have fallen, and its currency has weakened.
- Prioritizing communist party principles over business growth has negatively affected company profitability, its stock market, exports, and its attractiveness for needed foreign investment.
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