Market Week: July 03, 2023

The week in review

  • 1Q23 real GDP (final est.): +2.0% q/q SAAR
  • Headline/core PCE: +3.8%/+4.6% y/y
  • Real consumer spending: +0.5% m/m

The week ahead

  • Mfg./services PMIs
  • Employment & JOLTS

Thought of the week

Stocks and bonds have had a strong start to the year due to resilient economic data, a bounce back in profit margins and a moderation in the market’s expectations for interest rates. That being said, while stocks and bonds have improved from their lows of 2022, commodities finished 1H23 down due to cooling energy prices and weakening global manufacturing demand.

In terms of performance, U.S. large cap led the way, finishing 1H23 +15.5%. However, despite the rally, returns have been entirely driven by the market’s largest stocks, with the top 10 companies in the S&P 500 accounting for over 95% of the index’s YTD performance. Elsewhere, U.S. small caps lagged behind their large cap peers in 1H23 due to the lower quality of earnings and their greater exposure to cyclical sectors, which have underperformed this year.

In the international markets, DM and EM increased 11.2% and 4.8%, respectively, in 1H23, as a weaker U.S. dollar and strong economic data in both regions buoyed returns.
Some of this momentum, however, did wane toward the end of quarter in EM, as recent economic data from China have disappointed relative to expectations.

Lastly, U.S. fixed income increased 1.8% in 1H23 due to a moderation in interest rates. Within the fixed income universe, global high yield performed well, as better than expected earnings have supported credit quality. While the default rate and downgrades-to-upgrades have increased, they both still remain below long-term averages.

Looking ahead, investors should continue to be active and diversified, as the stock market’s narrow breadth, weakening expectations for forward earnings and the possibility of further rate hikes from the Fed could weigh on markets in the quarters ahead.

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