US stocks rise to close best month since 2020

U.S. stocks rallied after a tough first half of the year as easing expectations for interest rate hikes and upbeat earnings from several major technology and energy companies delivered the best month of performance since 2020.

The S&P 500 index rose 9.1 per cent. in July, its biggest monthly gain since November 2020. The blue-chip stock target was boosted by better-than-expected earnings but also by gloomy economic data, which convinced investors that the Federal Reserve may have to slow its aggressive monetary tightening.

The tech-heavy Nasdaq Composite Index fared even better: Its monthly gain of 12.3 percent was the biggest since April 2020, when the Fed stepped in to stabilize markets following the meltdown triggered by the global spread of Covid-19.

The strong performance in July contrasts with the first six months of the year, when the S&P fell 21 percent and the Nasdaq fell 29 percent, the worst first-half performance for the $44 billion U.S. stock market in more than 50 years.

This month, 86 percent of stocks in the S&P 500 are up, FactSet data show.

Shares in Amazon ended 10.4 percent higher on Friday – leaving them up 27.1 percent in July – after the e-commerce group beat analysts’ quarterly revenue forecasts and gave a positive outlook for the rest of the year on the strength of the performance in their cloud computing business.

Microsoft, Apple and Google parent Alphabet all also issued more confident outlooks than investors had expected, lifting a US technology sector that has an outsized weight in global markets.

In the energy sector, US oil supermajors ExxonMobil and Chevron reported record quarterly profits on Friday, thanks to rising oil and gas prices.

“Earnings in the second quarter came in better than expected, so some of that contributed to a better performance in July,” said Jack Ablin, chief investment officer at Cresset Capital.

However, Ablin noted that the primary driver for stocks this month has been falling interest rate expectations. Futures pricing on Friday suggested the Fed’s main funds rate would peak at 3.3 percent next February, from a range of 2.25 to 2.5 percent currently. In mid-June, such predictions ran as high as 3.9 percent.

In a sign of how investor sentiment is brightening, U.S. equity funds tracked by EPFR recorded their biggest inflows in six weeks this week, racking up $9.5 billion in net new investment. USD, according to Bank of America.

The gains have not been limited to the United States. The FTSE All-World index of developed and emerging market shares rose 6.9 percent this month. Europe’s Stoxx 600 has gained around 8 per cent.

The Fed, the world’s most influential central bank, has raised interest rates sharply in the first seven months of the year. However, data on Thursday showed the US economy contracted for a second straight quarter, raising hopes that the worst inflation cycle in four decades would ease and that the Fed may slow its policy tightening.

But there has been little evidence that inflation, which continues to run at four-decade highs, is slowing. And Fed Chairman Jay Powell, at the end of the bank’s two-day meeting on Wednesday, where interest rates were raised by 0.75 percentage points for the second straight month, reiterated his commitment to an inflation target of 2 percent.

Strategists at Barclays also warned that July’s strong performance for stocks and bonds “could be brought back down to earth” by inflation remaining high as a result of Russia’s invasion of Ukraine.

“Every bear market has strong rallies in it,” said Lou Brien, a strategist at DRW Trading Group.

“We’re in one of those difficult periods here where it’s not clear if we’ve seen the bottom or if this is a rally within a larger bear market.”