Aurelia Butler

NEW YORK (Reuters) -A U.S. stocks rally is cruising into a month that has proven strong in recent years, though equities must navigate employment data and an earnings season that could be precarious, with the Federal Reserve bent on raising U.S. interest rates. The S&P 500 defied recession fears and a U.S. banking crisis to notch a 15.9% gain in the first half. The Nasdaq Composite powered ahead 31.7% for its biggest first-half increase in four decades. Investors betting the upward trend will continue over the next few weeks have recent history on their side. The S&P 500 has posted a positive return in eight consecutive Julys, and the tech-heavy Nasdaq 100 index has climbed in July for 15 straight years. “We have had a pretty resilient market in the first half of this year,” said Mona Mahajan, senior investment strategist at Edward Jones. “The market needs one big question answered, and that is what does the economy look like in the back half of the year.”Several indicators show growing optimism about equities. Positive sentiment in the American Association of Individual Investors survey has come in above its historical average for four straight weeks, while positioning measures tracked by banks have shown investors recently increasing their exposure to stocks. The Cboe Volatility Index, which measures investor demand for protection against stock swings, recently hit its lowest level since early 2020. At the same time, July brings its share of potentially market-moving events. First up is next Friday’s U.S. employment report, which will give investors a snapshot of how the economy is faring after 500 basis points of rate hikes from the Fed since last year, its most aggressive tightening in decades. Signs of continued solid job growth could reinforce a view that has helped boost markets this year: that the U.S. economy can avoid a severe recession despite the Fed’s tightening. “The labor market is probably going to end up proving to be the big catalyst for what may happen market-wise and also monetary policy wise,” said Omar Aguilar, chief executive officer and chief investment officer of Schwab Asset Management.Second-quarter corporate results will kick off the following week. S&P 500 companies are expected to post an overall drop in earnings of 5.7% from the year-earlier period, according to Refinitiv IBES.Investors will focus on results from seven tech and other megacap companies, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA), whose outsized gains have driven the S&P 500’s rise this year.“To the degree the Magnificent Seven has been carrying this…, those are the multiples most likely to get hit with any sort of warning, any sort of negative announcement,” said John Lynch, chief investment officer for Comerica (NYSE:CMA) Wealth Management.The consumer price index report arrives on July 12, a crucial read on inflation before the Fed’s July 26 policy decision. The U.S. central bank held rates steady in June and has signaled two more increases are coming this year, including one widely expected in July. While stocks have so far taken policymakers’ projections of higher rates in stride, that could change if bond yields continue to rise. Benchmark yields recently hit three-month highs, with the 10-year U.S. Treasury yield last around 3.8%, well over double where it stood at the end of 2021.Rising yields generally dull the allure of stocks compared to bonds, but in recent months equity valuations have still climbed.The S&P 500 is trading at 19.1 times forward earnings estimates, well above its historic average P/E of 15.6 times, according to Refinitiv Datastream.”At some point, this move in interest rates has got to have some consequences for the markets,” Matt Maley, chief market strategist at Miller Tabak, said in a note on Friday.Some doubt the rally’s staying power. A Deutsche Bank (ETR:DBKGn) survey found more than three-quarters of investors believe the next 10% move in the S&P 500 will be down, compared to 24% who projected that in March.Those doubts could stem from concern about economic fallout from rate hikes.Analysts at UBS Global Wealth Management said in a recent note the likelihood of a recession hinges most on monetary policy becoming more restrictive, an eventuality stocks are not priced for. “With stocks already priced for the near perfection of a soft landing, we see better risk-reward in high-quality bonds over equities,” the UBS analysts wrote. More

NEW YORK (Reuters) -The U.S. stock market has powered higher in the first half of this year despite numerous obstacles, from banking sector turmoil to recurring doubts about the economy’s health.The S&P 500 is up 15.9% in 2023 – a rebound that surprised many analysts after equities’ brutal 2022 decline. The tech-heavy Nasdaq Composite has gained 31.7%, its best first half in 40 years. If history is a guide, stocks’ strong start may give them a tailwind in the second half. Since 1945, the S&P 500 went on to climb an average of 8% in the second half of the year when it rose at least 10% in the first six months, according to Sam Stovall, chief investment strategist at CFRA.Here are six key questions investors are posing as they assess the market’s prospects:WHERE’S THAT RECESSION?The U.S. economy has proven resilient in the face of the Federal Reserve’s aggressive monetary policy tightening, so far avoiding a recession many forecasters were predicting at the start of 2023. While a recession is now seen as a less likely scenario this year, economic concerns have not disappeared. A recession probability model run by the New York Federal Reserve based on the Treasury yield curve earlier this month projected a 71% chance of one in the next 12 months.“The prospect of a soft-landing, at least in investors’ minds, has gone from improbable early in the year to now quite possible,” analysts at UBS wrote. “Of course, this positive market scenario can evaporate quickly if inflation and jobs data disappoint.”Some analysts also worry that estimates of corporate earnings – which are expected to rise 1.4% in 2023 for S&P 500 companies, according to Refinitiv IBES data – will need to be adjusted sharply lower if a downturn arrives.HOW FAST WILL INFLATION FALL?The annual rate of inflation has come down by half since hitting 40-year highs last summer yet stands well above the 2% level the Fed would like to see before it begins pulling back on monetary policy tightening. The Fed paused rate hikes this month but is expected to raise rates again in July.Some investors view moderating inflation combined with resilient growth as a so-called Goldilocks scenario that is favorable to asset prices.CAN THE RALLY BROADEN?A handful of megacap names such as Apple Inc (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA) Corp are driving the S&P 500’s rally, creating concerns that gains may not be sustainable unless more stocks join in. While the S&P 500 has gained 15.9% this year, the equal-weight version of the index — a proxy for the average stock — has gained about 6%.The spread between the two indexes is around levels last seen during the dot-com bubble, analysts at HSBC noted in a recent report.“A concentration of equity returns from the largest companies is very unlikely to continue indefinitely,” the bank’s analyst wrote.WHEN WILL AI BEAR FINANCIAL FRUIT?Excitement over advances in artificial intelligence has helped push stocks higher and driven up earnings estimates. Investors will watch second-quarter results in coming weeks for clarity on how soon companies expect financial benefits to materialize.The S&P 500 tech sector now trades at 27 times forward earnings, according to Refinitiv Datastream. That is above its average of 20.9 times earnings, though well below levels reached during the dot com bubble.WHERE ARE THE WEAK SPOTS?The banking sector crisis resulting from Silicon Valley Bank’s failure in March did not end up being the systemic event many had feared, yet investors remain on the lookout for other financial system vulnerabilities that are being exacerbated by the Fed’s most aggressive rate hiking cycle in decades. One such area is commercial real estate, with concerns stemming from lingering office space vacancies from the pandemic.CAN EQUITIES COMPETE WITH BONDS AND CASH?Rising rates have boosted yields on fixed income assets and cash to their highest levels in decades, finally giving investors an alternative to equities. That does not appear to have hobbled stock returns so far this year, but it may dull the allure of equities going forward if rates stay elevated. The equity risk premium — which measures the S&P 500’s earnings yield against the yield on the 10-year Treasury note — puts stocks at around their least attractive levels in over a decade, according to Truist Advisory Services. More

WASHINGTON (Reuters) -President Joe Biden on Friday announced new measures to provide student loan relief to Americans and condemned the U.S. Supreme Court for blocking a plan to cancel hundreds of billions of dollars in debt that was popular with his voters.Thwarted by the conservative-leaning court, Biden told reporters that his administration would pursue student loan relief through a different avenue, the Higher Education Act. The Education Department launched a regulatory “rulemaking” process that is likely to take months. In a 6-3 decision earlier on Friday, the Supreme Court blocked Biden’s plan to cancel $430 billion in student loan debt. The ruling, which was welcomed by Republicans, threatened to dismantle part of the Democratic president’s policy agenda.Biden said his administration would pursue a different way to achieve his goal. “Today’s decision has closed one path. Now we’re going to start another,” Biden told reporters. “I believe the court’s decision to strike down my student debt relief program was a mistake, was wrong. I’m not going to stop fighting to deliver borrowers what they need, particularly those at the bottom end of the economic scale.”As part of the overall plan, the Education Department finalized a program to reduce payments that borrowers with undergraduate loans have to pay monthly to 5% of discretionary income rather than 10%, which the administration said would help them save $1,000 a year.Loan forgiveness would be offered to borrowers with balances of $12,000 or less after 10 years of payments rather than 20 years – a benefit aimed at helping community college graduates.Progressive voters, who are part of the coalition that helped elect Biden in 2020, long have put pressure on the White House to address student loan debt; the court’s decision intensified calls for further action.”The President has more tools to cancel student debt – and he must use them,” Democratic Senator Elizabeth Warren, a leading progressive voice, said on Twitter after the Supreme Court’s decision and before Biden spoke. Progressive House Democrat Alexandria Ocasio-Cortez urged Biden to use authorities under the Higher Education Act to continue loan forgiveness before payments resume after a pause. “We still have the power to cancel and must use it, or we’re looking at an economic crisis for millions of people,” she said on Twitter.About 53% of Americans supported Biden’s original student loan forgiveness program, while 81% of Democrats did so, a Reuters/Ipsos poll showed this year.Democrats want voters to see Biden fighting for student debt relief ahead of his re-election bid in 2024, hoping conservative rulings from the court on debt relief and affirmative action or race-conscious college admission considerations would galvanize them in the same way the court’s ruling to strike down abortion rights did in 2022.The White House made clear it would be putting blame on Republicans for stymieing student-loan relief efforts. Biden blasted Republican elected officials for supporting billions of dollars in pandemic-related loans to businesses that were eventually forgiven but not supporting student debt relief.Education Secretary Miguel Cardona, in a briefing with reporters, listed a handful of Republican lawmakers, whom he named, who collectively had had millions of dollars in pandemic-related loans forgiven.Republicans argued that Biden’s initial student-loan relief plan was unconstitutional and unfair.“Biden’s student loan bailout unfairly punished Americans who already paid off their loans, saved for college, or made a different career choice,” Republican National Committee (RNC) Chairwoman Ronna McDaniel said in a statement. “Americans saw right through this desperate vote grab, and we are thankful that the Supreme Court did as well.” More

WASHINGTON (Reuters) -The U.S. on Friday warned about a new Chinese counterespionage law, saying American and other foreign companies in the country could face penalties from Chinese authorities for regular business activities. Chinese lawmakers this year passed a wide-ranging update to Beijing’s anti-espionage legislation that goes into effect on July 1, banning the transfer of any information related to national security and broadening the definition of spying. China this year has also cracked down on U.S. consultancy and due diligence firms, a move business lobbies have said unnerved foreign investors in the world’s second-largest economy. The U.S. National Counterintelligence and Security Center (NCSC) said in a bulletin that China viewed outbound flow of data as a national security risk, and that the new and existing laws could compel companies’ locally employed Chinese nationals to assist in Chinese intelligence efforts. “These laws provide the PRC (People’s Republic of China) government with expanded legal grounds for accessing and controlling data held by U.S. firms in China,” the NCSC said. “U.S. companies and individuals in China could also face penalties for traditional business activities that Beijing deems acts of espionage or for actions that Beijing believes assist foreign sanctions against China,” it said. It said the ambiguities of the law meant that “any documents, data, materials or items” could be deemed relevant to Chinese national security, also putting journalists, academics and researchers at risk. China’s embassy in Washington said Beijing had a right to safeguard national security through domestic legislation.”China will continue to promote high-level opening-up and provide a more law-based and international business environment for companies from all countries, including the United States,” embassy spokesman Liu Pengyu said. Chinese leader Xi Jinping has emphasized national security since taking office in 2012. Suspicion in China of the U.S. and its allies has grown as the U.S.-China rivalry has intensified, yet Beijing has insisted it is opening up to overseas investment.U.S. officials have told Reuters that since the enactment of the Chinese law in April they have received a flood of questions from businesses and other groups about the risks of traveling to China. The U.S. State Department also updated its travel advisory for China on Friday, upgrading the “risk of wrongful detentions” among its warnings for Americans to reconsider travel to the country.U.S. Ambassador to China Nicholas Burns has said Beijing’s targeting of U.S. firms was politically motivated and that Washington would push back. More

(Reuters) -U.S. Treasury Secretary Janet Yellen said on Friday that the U.S. economy is on a path to maintain a strong labor market while reducing inflation, even if the economy cools a bit more.Yellen said in prepared remarks at a residential solar power company in New Orleans that strong household and business balance sheets will serve as a source of U.S. economic strength along with a continuing surge in U.S. factory construction.Yellen, who is making a campaign-style visit to New Orleans to tout President Joe Biden’s economic agenda, said that the U.S. economy has defied persistent predictions of recession this year, proving more resilient than expected.”I continue to believe that there is a path to reducing inflation while maintaining a healthy labor market. Without downplaying the significant risks ahead, the evidence that we’ve seen so far suggests that we are on that path,” Yellen said at a PosiGen Solar facility.Yellen said business executives have increasingly voiced confidence in the U.S. economy.”While there are parts of our economy that are slowing down, households are spending at a robust pace and businesses continue to invest,” she said. “Going forward, I expect the current strength of the labor market and robust household and business balance sheets to serve as a source of economic strength, even if our economy does cool a bit more as inflation falls.”Yellen highlighted the benefits of direct spending and tax subsidies for manufacturing of semiconductors and clean energy products in legislation passed last year.On Tuesday, the Treasury Department released a new analysis showing that real construction spending on new manufacturing facilities has doubled so far this year compared with the 2005-2022 average, driven largely by infrastructure, semiconductor and clean energy subsidies and tax incentives. Real spending on computer, electronics and electrical manufacturing facilities nearly quadrupled over the same period, the Treasury said.In later remarks at the Essence Festival’s Global Black Economic Forum, Yellen highlighted the Biden administration’s work to cut the Black unemployment rate and support Black business owners with $1.4 billion in COVID-related investments in Black-owned banks and community lenders and other credit programs.Yellen also said a temporary expansion of the Child Tax Credit helped lift over 700,000 Black children out of poverty in 2021 and said over 40% of the recipients of emergency rental assistance were Black. The Inflation Reduction Act, which provides generous tax subsidies for clean energy technology and electric vehicle battery manufacturing, provides added incentives for companies to invest in low-income communities, which Yellen said will provide more opportunities for people of color.”Today, we can safely say that our economic recovery from the pandemic has been historically inclusive and broad-based,” she added. More