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Market Contextualization

The month of July was positive for most equity indices although with smaller variations than the previous month but still corresponding to a very strong signal. We highlight the S&P500, which recorded its 5th consecutive month of appreciation and the Eurostoxx600 registering a good statistic with losses this year only last May. Meanwhile, the DAX40 index, representing the largest economy in the Eurozone and the 4th in the world, ended up renewing historical highs. In terms of sectors, Technology remains the richest, operating at high relative valuation multiples.

The main indices rose on the S&P500 and NASDAQ100 with the 7 tech mega-capitalizations concentrating the gains, putting some portfolios on the defensive (although the RUSSELL2000 of small and medium-sized companies had already started to show the ability to keep up with the main indices), in the face of a VIX Volatility that registered 2-year lows.  

July saw the timing of Q2 earnings and revenue estimates, with the average company beating expectations on earnings, although on revenues the percentage of companies was lower, supporting scenarios that companies can live with higher interest rates and inflation; suggesting greater persistence than expected.

Investors have continued to add equities to their portfolio exposure, but since the biggest drop in volatility in July, with falling option premiums, investors have also added ETF, precious metals and cryptocurrency allocations, meaning the market has continued to be "forced" to hold equities, but understanding the inherent risks of systematically buying assets (with higher valuations) that are already back above the 5 and 10 Year averages. 

Uncertainty has focused more on China, which has the most disappointing performances due to weak macroeconomic variables that continue to suggest a reliance on stimulus in the face of slowing global exports and stagnant domestic consumption; not to mention its real estate challenges.

The strong start of the 2nd half of the year was also marked by the recovery of Energy prices such as Crude, Copper and Wheat contracts, with gains of +15.8%, +7.14% and +4.64% respectively, overshadowing the disinflation scenario that is gradually taking hold in developed economies.

Prospectively, the month of August carries a greater probability of correction and consolidation of the accumulated gains in the year, but without a trend reversal, which may be logical to present a less constructive reaction given the premiums they carry. Short-term US bonds up to 3-6 months with yields above 5% are in demand in view of liquidity, as they correspond to a higher dividend yield and EPS to share price ratio. Robust US economic data suggest that the Fed may raise interest rates again in September, while disappointing data will tend to benefit risk assets such as equities, as they are likely to pause further hikes or even end the cycle.