July didn’t generally bring gains for investors. Stocks were flat and bonds lost about 1%. These returns were hardly noteworthy, but they did reflect a market digesting crosscurrents of strong corporate earnings, a Federal Reserve that remains cautious on inflation, and heightened tensions in the Middle East.
Regarding corporate earnings, the strongest news came from Microsoft and Amazon, whose results showed that demand for cloud computing and artificial intelligence remains substantial. In fact, Microsoft added nearly half a trillion dollars to their market capitalization in a single day. Large U.S. financial institutions have also grown their earnings. Banks, for example, have grown their bottom lines by roughly 15% year-over-year. Not to be excluded from the surge in profits, international companies also show signs of strength. One broad European stock benchmark is forecast to see earnings climb 20% year over year in the second quarter.
Unfortunately, corporate earnings do not tell the full story. A renewed round of fighting in the Middle East has pushed the price of a barrel of oil back to $85. That is still lower than its recent high of $119, but still above the pre-conflict level. The war’s inflationary effects are squarely on the Federal Reserve’s radar. The Fed held the federal funds rate steady at 3.50%, but the decision included dissent from a small group of officials who favored another quarter-point increase. The takeaway was clear: the Fed is not yet ready to declare total victory over inflation. Future rate decisions will likely depend on whether inflation continues to ease or proves more persistent than expected.
While not as positive as corporate earnings, there is other positive news about the economy. Payrolls are growing, albeit at a mild pace. The initial estimate for second-quarter GDP growth was +1.5%. This adds to the picture of an economy that is still growing, just not at a rapid pace.