Good Morning,
This summer, markets showcased resilience amidst a backdrop of mixed economic indicators. Central bank actions, sectoral dynamics, and geopolitical factors added to market volatility, while earnings season illuminated the impact of ongoing challenges on corporate performance.
Lets jump in.
Market Outlook
Markets
US stocks climbed this summer as inflation cooled, bolstering expectations that the Federal Reserve can bring price inflation down without causing a severe downturn
The S&P 500 has climbed more than 14% since the start of the year after reaching a peak of 19%
The Nasdaq led indices with a 27% increase
Within the S&P 500 the sectors with biggest gains are communication services (37.2%), Information Technology (34.2%), and Consumer Discretionary (27.7%)
Earnings
Apple shares fell 4.8% after reporting a forecasted decline in revenue for the following quarters (CNBC)
Amazon shares rallied 8% following a blowout in Q2 earnings and upbeat guidance (CNBC)
Walmart beat Q2 earnings and revenue expectations and raised its FY guidance thanks to its low-price reputation drawing grocery customers (CNBC)
AI Hype
The stock markets broad rally is mainly driven by AI players like Nvidia, Alphabet, and Microsoft fueled by the artificial intelligence intrigue. Despite rising interest rates the technology sector’s strength seems to have muted fears of a recession.
Many AI companies although highly profitable have yet to figure out how to monetize their AI capabilities. For now, their P/E ratios offer very little support given lack of AI monetization.
Economic Perspective
CPI vs PCE
The Consumer Price Index is a report by the U.S. Bureau of Labor Statistics that measures monthly data to calculate the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services
The Personal Consumption Expenditure (PCE) is a report by the Bureau of Economic Analysis that measures the average monthly expenditure of all households, including urban and rural. Furthermore, because of its approach in calculating the substitution of goods the PCE report is seen as a more accurate inflation gauge to the Federal Reserve
Inflation
The Consumer Price Index (CPI) rose a moderate 3.2% from a year ago in July, rising 0.2% for the month, marking the first increase in more than a year
Excluding volatile food and energy prices, core CPI also increased 0.2% for the month and 4.7% year over year, the lowest since October 2021
Although CPI remains above FED longterm inflation expectations, the downturn points to positive signs that inflation is losing its grip on the U.S. economy
FED’s Outlook
Economic activity has been expanding, job gains have been robust, and the unemployment rate has remained low while inflation remains above the Federal Reserve’s target inflation rate of 2%
The Federal Reserve seeks to achieve maximum employment and price stability for this reason most board committee members agreed to raise the target range for the federal funds rate to 5.20 to 5.50%
In July Federal Reserve Board Chairman, Jerome Powell, suggested the possibility for one more rate hike this year and for rates to remain higher throughout the following year.
Mergers & Acquisitions Activity
Top Deals
Quarter 1: Bank of Montreal (BMO) agreed to buy Bank of the West for whopping $16.3 billion cash deal, a combination that will create the 15th largest US lender.
The acquisition of Bank of the West adds nearly 1.8 million customers and 514 additional branches and commercial wealth offices, which adds approximately $56 billion of loans and $89 billion of deposits
The purchase price is estimated at 1.5x Bank of the West’s tangible common book value
Quarter 2: Air conditioner maker Carrier Global Corporate (NYSE: CARR) acquired German industrial firm Viessmann Group’s Unit that makes heating boilers and heat pumps in a $14.17 billion cash and stock deal.
The acquisition is expected to enhance Carrier’s strategy to capitalize on the rapid energy transition in Europe
Quarter 3: L3Harris Technologies (NYSE: LHX) completed the acquisition of Aerojet Rocketdyne for $4.7 billion which adds Aerojet’s expertise in rocket propulsion systems for space and defense technologies.
This acquisition comes nearly two years after Lockheed Martin sought to buy the Aerojet in a $4.4 billion bid that was blocked by antitrust regulators
IPOs
In 2021 as the market boomed and interest rates were at historical lows, a record number of Initial Public Offerings (IPO) increased. This quickly reversed as economic activity dwindled due to rising interest rates.
Ongoing economic concerns and the valuation overhang from the pre-2022 era set the stage for a quiet year for IPOs
Interest rates rising and stock prices falling made IPOs less attractive in 2022 and 2023
Market volatility makes the stock market less predictable which is a less ideal environment for IPOs