Growth stocks led the market for most of July as lower interest rates and strong earnings propelled technology-oriented companies like Apple, Alphabet and Microsoft to higher levels. Although a lukewarm release from Amazon on the last trading day of the month dampened the overall trend, the overall theme was still one of the few giants pulling the overall index higher. Because these companies represent over 20% of the S&P 500’s market cap, their performance was largely responsible for the strong S&P 500 return. The S&P 500 Growth index gained 3.79% while the core S&P 500, which contains both growth and value, gained 2.38%. Removing the effect of market cap weighting on the index demonstrates the impact of these tech companies even more: the Invesco S&P 500 Equal Weight ETF gained only 1.27% in July. Large Growth was the one bright spot in an otherwise difficult month for stocks. Both mid and small cap stocks in the U.S. struggled, although mid-caps eked out a positive return in the final days of July (0.35% and -2.39%, respectively). Abroad, developed markets got by with a 0.75% return, but emerging markets got whipped to the tune of a -6.73% loss. The struggle in EM was primarily due to the Chinese government’s regulatory posture toward some of its largest technology companies; the iShares MSCI EM ex China ETF lost only 2.50% by comparison, demonstrating the negative impact China had on the broader asset class. Bonds, which got off to a terrible start in the first quarter, saw phenomenal returns in July. The Bloomberg Barclays Aggregate Bond Index gained 1.12% due primarily to the tailwinds provided by falling interest rates. The yield on the 10-year U.S. treasury had already been falling since early May, but after opening July at 1.47% it fell even more precipitously to a low point of 1.18% before finishing the month at 1.24%. The move downward in interest rates was generally viewed as a response to fears about the impact of COVID’s Delta variant may have on the economic recovery; rates also may have fallen due to the belief that inflation will, in fact be transitory and moderate fairly quickly.

Earnings season is well under way and, even with unprecedentedly high expectations last month, it has not disappointed thus far. According to the latest release from FactSet on July 30, of the 59% of companies in the S&P 500 that have reported results so far, 88% have reported earnings above consensus estimates. The blended growth rate (which combines the actual earnings of companies which have reported with the estimates for those which have not yet) for the second quarter is 85.1%. If this blended growth rate holds, it will be the highest year-over-year earnings growth rate since the fourth quarter of 2009. Forward-earnings projections are supportive of future equity returns. Although the current forward 12-month price-to-earnings ratio of 21.3 is higher than the 5-year average of 18.1, it is still right around where it started 2021. Although the P/E ratio is a poor indicator of what stocks do in the short-term, the fact that stocks in the S&P 500 are still the same “value” today as they were in January, despite gaining 17.99% in the meantime, due to the rapid growth in earnings means that we’re still not in bubble territory, so to speak.

The regulatory crackdown of China’s technology companies deserves mention. Since the Chinese government halted the initial public offering (IPO) of Jack Ma’s Ant group in November 2020, the government has become increasingly paranoid when it comes to the actions taken by large and influential tech companies. The most recent episode occurred days after the IPO of Didi Global, China’s largest ride-hailing service, when the Chinese government harshly punished the company for listing its shares on the New York Stock Exchange. Beijing’s moves against Didi included the halting of new user sign-ups and ordering it off app stores. Chinese companies represent over 40% of the market capitalization of the MSCI Emerging Market index, so the increasing volume of this narrative will continue to be a focus going forward, at least for EM investors, but likely for all investors, as what happens in China has a growing impact on the global economy and markets.

Strong earnings and low interest rates lifted some stocks while Delta variant fears put downward pressure on most others. To be fair, several asset classes were due for a flat to negative month after robust rallies over the past 6-8 months when traditional economy stocks began to rebound from their depressed levels in 2020. Mid and small caps had gained 58.17% and 42.77%, from November 1^st through June 30^th, and are still only 2.21% and 4.99% from their all-time highs as of the end of July.

July was probably a frustrating month for many diversified investors. Investors naturally benchmark their performance to the headline numbers they see in financial media, and those numbers typically involve the S&P 500 and tech-based NASDAQ. With both of those indexes posting strong returns with everything else struggling, investors who diversify into smaller stocks, value stocks and international stocks may have had muted overall returns for the month.

On July 19 the Dow dropped 2.1%, suffering its worst loss since October of last year. Many were calling it the beginning of a correction as the Delta variant stoked fears of renewed economic restrictions. The selling was short-lived, however, and markets barely experienced a negative day from then to the end of July. Given the Fed’s continued easy money policies, it can be difficult to fathom what type of shock would be required to seriously derail the stock market right now. While we are of the view that much of the current market’s resiliency is justified, we once again caution investors against complacency and greed. Rather than reach for more return by assuming more risk, we advise our readers to let their long-term goals, and their comfort with market volatility, be the ultimate driver of their investment decisions.

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