July was a great month pretty much across the board.
The markets. Financial markets did very well, with the U.S. indices all up—the Dow by almost 5 percent, the S&P 500 by almost 4 percent, and the Nasdaq, which got whacked at month-end, by more than 2 percent. Even international markets bounced after a terrible June, with developed markets up by almost 2.5 percent and emerging markets up just over 2 percent. Clearly, investors are pretty positive about the future.
The economy. Looking at the economic data, that optimism is well founded, as the global economy has continued to grow. Here in the U.S., first-quarter growth was revised up from 2 percent to 2.2 percent; meanwhile, second-quarter growth came in at 4.1 percent—the highest level since 2014. The faster growth was broad based, driven by higher consumer spending, solid business investment, and faster government spending growth, along with a notable bump from a surge in exports. While this level of growth may not be sustainable, strong job growth, which has driven high levels of both consumer and business confidence, provides a good foundation for the next couple of quarters as well.
The Federal Reserve also seems to be on board. With both unemployment and inflation at Fed targets, Chair Jerome Powell essentially declared victory during his congressional testimony in July. This is a more positive take on the economy than we have heard from the Fed in years, and it ratified the positive investor take on the economy.
Business. From a corporate point of view, the news was equally as good or even better. Driven by the strong economy, corporate sales have taken off. Almost three-quarters of S&P 500 companies have reported sales increases above expectations, which is significantly above the five-year average. The amount of the beats is also above average. Sales growth is not only doing well in absolute terms, but it is also beating expectations, which is positive for market performance.
Sales matter, but it is the money a company keeps—the earnings—that matter more. Here, the news was also very good, with five out of six companies beating estimates so far. Turning to earnings growth, it was at 21.3 percent as of the end of July, up from an estimate of 20 percent at the end of June. As with the economic data, not only is the news good, but it keeps getting better.
Risks. Despite all the good news, risks remain. While policy risks seem to be receding, as North Korea moves out of the headlines and the trade war between Europe and the U.S. has been put on hold, China remains a major area of trade concern. High-profile earnings misses by major tech companies have rattled market confidence as well.
More of the same. At the moment, though, the strong economic and corporate fundamentals seem to have those risks well contained. As we move out of July, investors seem to be focused on the good news, rather than on the risks. As such, the outlook for August remains positive.
While it likely will not be as strong as July, given those real risks, the strong fundamentals should help keep things moving forward this month.