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The final trading week of July is shaping up to be a very good one for those long equities. After a choppy start to the five-day stretch, the major equity averages have staged a notable rally, prompted by a better-than-anticipated reaction to the Federal Reserve’s monetary policy decision and commentary from Chairman Jerome Powell. That, along with better-than-expected earnings news, including yesterday’s afternoon reports from Apple (AAPL) and Amazon.com (AMZN), and investors shrugging off the second-consecutive GDP contraction, ignited the recent buying spree.

The heavy slate of economic and earnings news continued this morning, with the latest personal income and spending data from the Labor Department released at 8:30 A.M. (EDT). That report showed personal income increased 0.6% last month, while personal spending climbed 1.1%. But what investors were keying on was the latest personal consumption expenditure (PCE) data, which is the most closely watched measure of inflation by the central bank. The June reading came in at 1.0% sequentially and 6.8% year over year, with the latter representing a record high. Likewise, the employment cost index came in higher than expected (+1.3% versus +1.2% estimate).

U.S. equity futures, which were higher ahead of the economic news on solid earnings data (see below), gave back some of the early morning gains on the personal income and spending report, but remain in the green ahead of the opening bell.

Later this morning, we will get the final revision to the July Consumer Sentiment reading from the University of Michigan. Recent economic data have shown some signs that the U.S. economy is slowing, as the inflation and the Federal Reserve’s more-restrictive monetary policies are leading to some demand destruction. Still, following Wednesday’s Federal Reserve press conference, more people are thinking that a “soft landing” for the U.S. economy is possible. Continued strength in the labor market is proving that hope.

Meantime, all eyes were on the latest results from Apple and Amazon.com after yesterday’s closing bell, and the investment community liked that both companies surpassed revenue expectations. Apple posted a new quarterly revenue record of $83.0 billion, helping the company beat Wall Street’s earnings estimate. iPhone sales slowed down dramatically, and Apple’s services revenue fell versus the prior quarter. However, much like fellow tech giants Alphabet (GOOG) and Microsoft (MSFT) the results were not as bad as feared, and the relief rally continued for a technology sector that was beaten down earlier this year on inflation and higher borrowing costs concerns. Likewise, Amazon.com reported revenue that topped Wall Street’s estimates and gave a strong sales forecast for the current quarter. The latter helped allay investor concerns about reduced spending by inflation-shaken consumers. These two reports should give another boost to the NASDAQ Composite, which has rallied more than 5% over the last two days and is looking at a more than 10% rally for the month.

This morning, the earnings news centered on the oil patch, with the latest quarterly results from industry heavyweights Exxon Mobil (XOM) and Chevron (CVX) making headlines. Not surprisingly, given the surge in global energy prices this year, both companies beat expectations on the top and bottom lines. Shares of both oil companies are looking at nicely higher openings today. Conversely, Procter & Gamble (PG) stock is lower in pre-market action, as the consumer goods giant issued fiscal 2023 guidance than was below the consensus expectation. Intel (INTC) shares are also getting slammed after reporting disappointing quarterly results.

In addition to better-than-anticipated results from Corporate America the last two weeks, the main impetus for stocks was Fed Chairman Powell’s monetary policy decision press conference on Wednesday afternoon. The central bank leader struck what many market watchers believed was a slightly more dovish tone. He said that the federal funds rate was at the neutral level. That, along with no change in the central bank’s 2022 federal-funds rate target, has investors thinking that the Fed is no longer that far behind the curve and can get to its yearend target with a series of 50- and 25-basis point hikes the rest of the way. But will today’s aforementioned high inflation data change that sentiment?

The risks for the equity market, including inflation and a potential recession (if we are not already in one), are still present. The continued inversion of the yield curve suggests that a recession is a possibility. The recent movement into fixed-income securities following yesterday’s GDP data and the pickup in interest in more-defensive equities are indicators of some continued nervousness among investors, despite the recent rally on Wall Street. The utilities were among the leading sectors yesterday.

So what is an investor to do? We recommend maintaining a well-balanced portfolio of stocks, bonds, and cash, with the equity portion focused on higher-quality companies. These entities with their strong balance sheets, ample cash flows, and history of steady earnings growth are best positioned to weather an economic downturn better than some of the less profitable and less capitalized smaller-sized companies. – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.

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