Weekly Market Update: July 31, 2023

Alex Ralicki |

The consumer sector remains the main cog in the continued economic expansion. Supported by a still tight labor market, which has seen a series of weekly initial unemployment claim declines since mid-June, the U.S. consumer continues to spend, particularly on services. It should be noted that the Conference Board’s Consumer Confidence Index, which measures and compares how consumers view the overall economy, business conditions, and the labor market presently and over the next six months, climbed in July, to a two-year high.

The resiliency of the U.S. consumer has raised hopes that the Federal Reserve can orchestrate a “soft landing” for the domestic economy. That said, we have seen some red flags recently, such as lackluster June retail sales data and moderating personal expenditures in May. Then, there are concerns that mounting credit card balances financed at higher rates and the resumption of student loan repayments in September will eventually force consumers to cut back on discretionary spending.

Earnings season is again proving better than feared. True, profits for the S&P 500 companies likely fell for the third-consecutive quarter, but comparisons have surprised to the upside. Most importantly, the results from the big money center banks did not show elevated signs of stress in the financial system. This assuaged worries about any near-term banking crisis, but with interest rates still on the rise, the resultant impact on the health of the overall financial system will be scrutinized.

A recession down the road is still plausible. The Conference Board’s Leading Economic Index, which provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term, has fallen sharply over the last 12 months. Meanwhile, the Treasury market yield curve remains sharply inverted, another significant indicator of tougher economic conditions ahead.

Conclusion: The equity market rally, which has been fueled, in large part, by the strength of the mega-cap stocks, has valuations looking stretched. S&P 500 companies recently traded at nearly 20 times earnings, leaving many stocks susceptible to selling on negative news. Thus, a well-diversified portfolio of high-quality companies is recommended to reduce possible near-term downside risk associated with a market trading at a heightened multiple.


Source: ValueLine.com