A combination of favorable earnings reports and economic data moved stocks higher last week. The weekly return for the S&P 500 Index was +1.0%, the Dow was +0.7%, and the NASDAQ was +2.1%. Within the S&P 500, the Communication Services, Energy, and Materials sectors led the market. The 10-year U.S. Treasury note yield increased to 3.969% at Friday’s close versus 3.839% the previous week.
The Federal Open Market Committee (FOMC) raised the Fed funds rate by 0.25% to a 5.25% to 5.50% target range. Current Fed funds futures indicate a 79.5% probability the Federal Reserve could pause at its September meeting. The data-dependent Fed will have lots to consider between now and the September meeting, starting with the July employment report this Friday.
Second quarter Gross Domestic Product (GDP) growth was 2.4%, showing resiliency in the economy despite the impact of higher interest rates. Inflation continued to moderate with the June Personal Consumption Expenditures (PCE) Price Index +3.0% year-over-year and core PCE, which excludes food and energy prices, +4.1% year-over-year.
We are halfway through the second quarter earnings reporting period with 254 companies reported. The earnings flow continues this week with 169 companies in the S&P 500 Index scheduled to report earnings. Second quarter earnings expectation for the S&P 500 Index is a 6.4% year-over-year earnings decline on a revenue decline of 0.4%. Current consensus for full year 2023 earnings is an increase of 0.7% on revenue growth of 1.6%.
In our Dissecting Headlines section, we look at second quarter GDP.
Financial Market Update
Dissecting Headlines: Gross Domestic Product
Gross Domestic Product (GDP) is a measure of the total dollar value of all goods and services produced by a nation’s economy. It can be calculated by summing personal consumption expenditures, gross private domestic investment, government consumptions expenditures and gross investments, and net exports of goods and services. The U.S. is the largest economy in the world with GDP of approximately $26.8 trillion, followed by China, Japan, and Germany.
Second quarter real GDP increased at an annual rate of 2.4%. This is the advance number and is subject to revision. The second estimate for 2Q GDP, based on more complete data, will be released on August 30, 2023. Approximately half of the quarter’s growth came from personal consumption expenditures, both goods & services, while private domestic investment accounted for approximately 40% of growth, government spending accounted for approximately 19% of growth, and net exports (exports minus imports) subtracted modestly.
Recreational goods and vehicles, gasoline and other energy goods were the primary positive drivers for the personal consumption expenditure goods, while motor vehicles and parts decreased. The services subcategory was driven upwards primarily by housing and utilities, health care, and financial services, while negatively affected by food services and accommodations. Fixed investments were disproportionally driven by transportation equipment and software IP products while negatively affected by residential fixed investments. In the federal subcategory, national defense spending remained consistent from the first quarter, while non-defense spending dropped in comparison to last quarter.
The U.S. economy has shown resilience despite the impact of the Federal Reserve’s tightening of economic conditions, leading to the view that the Fed could indeed engineer a soft landing for the economy.