Market Analysis
August 1, 2022 | Market news

At a glance

Stocks had a strong July, despite a slowing U.S. economy. Higher short-term interest rates from the Federal Reserve and lower long-term interest rates present a challenging backdrop.

U.S. Bank Global Health Check

The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.

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Source: U.S. Bank Asset Management Group, July 29, 2022.

Number of the week:


The annualized U.S. real gross domestic product in the second quarter. It’s the second consecutive quarter of negative growth, following -1.6% last quarter.

Term of the week:

Contraction – In economics, contraction refers to a phase of the business cycle in which the economy as a whole is in decline. A contraction generally occurs after the business cycle peaks, but before it becomes a trough. According to most economists, when a country's real gross domestic product has declined for two or more consecutive quarters, a recession has occurred.

Quote of the week:

“To be determined is whether the July performance is indicative of a market bottom. Elevated inflation, slowing economic growth and rising interest rates suggest that the strong performance in July is a bear market rally, rather than a market bottom. Conversely, earnings are holding up reasonably well, providing valuation support.”

 Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank

Global economy

Quick take: The U.S. economy is in contraction, with elevated inflation muting consumer sentiment. European growth is slowing but surprisingly strong in the face of accelerating inflation.

Our view: Our U.S. Health Check indicates positive but below-trend economic activity and decelerating momentum as the Federal Reserve (Fed) tightens monetary policy to combat inflation. Outside the U.S., our foreign scores are mixed but slowing. Developed economic activity remains above long-term median levels while emerging market economies are below long-term medians.

  • Key points: hides details

    • The U.S. economy shrank for the second quarter in a row, to an annualized rate of -0.9% for the second quarter. A 2% drop in inventories was the primary driver; exports recovered and spending on services remained strong. Two measures of consumer sentiment, from the Conference Board and the University of Michigan, remain at very low levels, though consumer spending remains solid, due in part to robust wage growth. The Employment Cost Index rose 5.1% year-over-year through the second quarter, with wages rising 5.2%. However, the Fed’s preferred inflation measure, the core Personal Consumption Expenditure deflator (excludes food and energy), accelerated to 4.8% over the past year, absorbing most of the wage increases. A solid July employment report this week may affirm that consumer health remains solid, despite recent economic weakness.
    • The Eurozone economy performed well over the past year, expanding 4% through the second quarter, slower than the 5.4% pace in the first quarter but much faster than consensus forecasts. Inflation, with consumer prices rising 8.9% for the year ending in July, and waning consumer and business sentiment in the face of energy risks from the Russia/Ukraine conflict are weighing on forward prospects.
    • China appears to be struggling to recover from regional coronavirus lockdowns. The official July survey of manufacturing purchasing managers moved back into contraction. Reports from non-manufacturing managers indicated slower activity, though still expanding. Releases from this week’s Politburo meeting indicated China is unlikely to reach growth targets set early this year and is unlikely to use new stimulus measures to lift output.

Equity markets

Quick take: Equity prices rose in July, led by growth-oriented companies. Investors have reset earnings projections modestly lower.

Our view: Price volatility is likely to continue while uncertainty surrounding inflation, interest rates, pace of earnings growth, the Russia/Ukraine crisis and technical price deterioration persists.

  • Key points: hides details

    • The stock market had a strong July. The S&P 500 advanced 9.1% and all 11 sectors posted gains for the month. The Consumer Discretionary (18.9%) and Information Technology (13.5%) sectors led for the month. For the year, performance remains lackluster. The S&P 500 ended July down 13.3% in 2022, with nine of 11 S&P 500 sectors in negative territory.
    • To be determined is whether the July performance is indicative of a market bottom. Elevated inflation, slowing economic growth and rising interest rates suggest that the strong performance in July is a bear market rally, rather than a market bottom. Conversely, earnings are holding up reasonably well, providing valuation support.
    • Second quarter results present mixed signals, though guidance is largely positive. Sales and earnings are trending up 13.8% and 6.0%, respectively, with 56% of S&P 500 companies reporting as of Friday’s close. Expectations heading into the quarter were for sales to increase 10.3% and earnings to rise 4.5%. However, Energy and Industrial sector earnings are the primary contributors. Five of 11 S&P 500 sectors are posting negative year-over-year earnings growth, adversely impacted by macroeconomic headwinds. Consensus for 2022 and 2023 earnings projections are trending modestly lower, roughly $226 and $244, respectively, but still above beginning-of-year levels.
    • Businesses continue to spend on technology and targeted ads, bolstering sentiment and Consumer Discretionary and Information Technology performance in July. E-commerce sales remain soft, with consumers yearning to get out and into stores, restaurants, destinations and “experiences.”

Bond markets

Quick take: Treasury yields fell (prices rose) following the Fed’s meeting last week. Investors now hold higher expectations of rate cuts in 2023, which diverges from Fed guidance for continued rate hikes. Riskier bonds and stocks outperformed in response. However, inflation data remains hot and could pressure the Fed to signal more rate hikes ahead.

Our view: Tighter monetary policy and slowing economic growth remain headwinds for riskier asset prices. We prefer higher-than-normal allocations to high-quality bonds that can help offset equity risk.

  • Key points: hides details

    • The Fed increased its target federal funds interest rate by 0.75% to a range of 2.25% to 2.50% last week. Chairman Jerome Powell said the policy rate is near neutral (neither restrictive nor stimulative) and another 0.75% increase at the September meeting is possible. Investors now expect the policy rate to near 3.3% by year end before falling by the end of 2023. Powell said the June Summary of Economic Projections, which details Fed projections for economic data and interest rates, is still the best reflection of the Fed’s thinking. That shows rate hikes to 3.0% to 3.5% by year end and more next year. Tighter monetary conditions paired with slowing growth are key factors influencing our somewhat defensive positioning in diversified investment portfolios.
    • Riskier high yield corporate and municipal bonds performed well last week. Second quarter earnings have proven resilient so far. On balance, company cash levels are still high, though declining. We favor investment-grade corporate and municipal bonds, since these issuers have stronger balance sheets that help provide a buffer against near-term economic challenges.

Real assets

Quick take: Real assets outperformed the S&P 500 last week, with interest rate declines leading to large gains in sectors that provide dividend income. Commodities also turned in strong performance as the market started to predict an earlier Fed pivot to an easing of monetary policy.

Our view: We continue to see value in real assets’ defensive sectors. Infrastructure should continue to outperform on a relative basis, with investors favoring tangible assets with stable cash flows as we move past peak earnings growth.

  • Key points: hides details

    • Real Estate outperformed the S&P 500 by 1% last week as interest rates fell. Residential and office properties were the top performers, while data centers and retail lagged. Valuation multiples have recovered some recently with the decline in interest rates, which is a positive for real estate prices.
    • Infrastructure outperformed the S&P 500 last week, led by midstream energy and utilities, which beat the index by 4% and 2%, respectively. Airports were the main detractor from performance.
    • Crude oil rose 4% last week, with domestic inventories of crude and refined products falling. We still see the crude market as undersupplied, which should be supportive for prices over a longer time horizon.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. 

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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