NEW YORK, July 1 (Reuters) - The U.S. stock market is
reeling from its worst first half of any year since 1970, with
investors girding for a series of potential flashpoints in July
that may set Wall Street's course for the coming months.
Second-quarter corporate earnings, hotly anticipated U.S.
inflation data and the Federal Reserves monetary policy meeting
are among potentially pivotal events after the S&P 500 fell
20.6% in the initial six months of 2022.
For now, the mood on Wall Street is grim. Bonds, which
investors count on to offset stock declines, have tumbled
alongside equities, with the ICE BofA Treasury Index
on pace for its worst year in the index's history. Some 90% of
respondents in a recent Deutsche Bank survey expected a U.S.
recession by the end of 2023.
The key factor behind the turmoil in markets is the Fed,
which has been rapidly tightening monetary policy to fight the
highest inflation in decades following almost two years of
emergency measures that helped buoy stocks and stoke growth.
We could really use just slightly less bad news in July,"
said Eric Kuby, chief investment officer at North Star
Investment Management. "Hopefully, it could turn the back half
of 2022 in a more favorable light.
History, however, "does not offer very encouraging news" for
those hoping the bleak first half will be followed by a bounce
in the latter part the year, wrote CFRA chief investment
strategist Sam Stovall.
Of the 10 worst starts to the year for the S&P 500 since
World War Two, the index has posted gains in the second six
months of the year only half the time, rising an average of
2.3%, Stovall said in a recent report.
On the data front, reports on employment and inflation will
give investors a snapshot of the economy after 150 basis points
of rate increases already delivered by the Fed.
A disappointing jobs report next Friday could exacerbate
concerns of a potential recession. The following week brings
data on U.S. consumer prices, after a hotter-than-expected
report last month triggered a selloff in stocks and prompted the
Fed to deliver a hefty 75 basis point rate increase in
There has been recent evidence of waning growth. Data on
Friday showed U.S. manufacturing activity falling to a two-year
low in June, following a report earlier in the week that showed
that June consumer confidence at its lowest in 16 months.
The key question is, what will roll over first: will it be
inflation or growth? said Angelo Kourkafas, an investment
strategist at Edward Jones.
Second-quarter earnings start arriving in force the week of
July 11, indicating whether companies can keep living up to
estimates despite surging inflation and growth worries.
Analysts expect quarterly earnings to grow by 5.6% from a
year ago, revised down slightly from early April's estimate for
6.8% growth, according to Refinitiv IBES.
If companies "can just match or maybe hurdle over lower
expectations, I think that will be a positive tailwind for stock
prices," said Anthony Saglimbene, global market strategist at
Strategists at Goldman Sachs are less sanguine, warning that
consensus margin forecasts suggest earnings estimates are
"likely too optimistic" and margins for the median S&P 500
company will likely decline next year "whether or not the
economy falls into recession."
"While investors are focused on the possibility of
recession, the equity market does not appear to be fully
reflecting the downside risks to earnings," Goldman said in a
note this week.
Julys data should factor into the Fed's actions at its next
meeting on July 26-27, when it is broadly expected to raise
rates by another 75 basis points.
Some investors predict slowing growth will prompt the Fed to
eventually soften its stance sooner than policymakers project.
But analysts at Capital Economics disagreed, writing on Friday
that such a rapid reversal would be inconsistent with the
central bank's behavior in recent decades.
As a result, "we dont expect US equities and Treasuries to
fare well in the second half," they said.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and