US market review – July 2016

US Equity Market

US equity indices rebounded in July after a June that was marred by the fallout from the UK’s Brexit vote. Investors drew encouragement from some relatively strong corporate earnings releases, and both the Dow Jones Industrial Average Index and the S&P 500 Index both hit new all-time highs during the month.

During July, the Dow Jones Industrial Average Index rose by 2.8%, while the S&P 500 Index climbed by 3.6% and the Nasdaq Index rose by 6.6%. Since the start of the year, the Dow Jones Industrial Average Index posted an increase of 5.8%, while the S&P 500 Index and the Nasdaq Index rose by 6.3% and 3.1% respectively.

Federal Reserve (Fed) policymakers left interest rates unchanged at their July meeting. The members of the Federal Open Market Committee (FOMC) remained unwilling to implement further tightening until inflation meets its target of 2% , despite evidence of strength in household spending and employment. The Fed is still widely expected to raise rates this year, and an increase at the FOMC’s next meeting in September is considered highly probable. The Fed is considered unlikely to make a move on monetary policy at its November meeting, which takes place on 1-2 November – only a few days before the US Presidential Election on 8 November.

The US economy posted annualised growth of 1.2% during the second quarter of 2016. This expansion was weaker than expected and first-quarter growth was revised down from 1.1% to 0.8%. Although consumer rose strongly, growing by 4.2% year on year, business investment dropped by 9.7%.

Information technology was the strongest-performing industry sector in the S&P 500 Index during July, boosted by strong earnings results from some key companies. The health care, materials and consumer discretionary sectors also performed relatively strongly; meanwhile, improving earnings releases provided a boost for the financial sector. In comparison, energy was the worst-performing sector over the month, followed by utilities and consumer staples.

By the end of July, over 70% of companies in the S&P 500 Index had announced their second-quarter earnings results, and over 70% of these firms had beaten their forecasts. Notable companies that exceeded expectations included high-profile companies Apple, Alphabet (Google’s parent company), Amazon, and Facebook. However, oil & gas company Exxon Mobil reported a 60% reduction in earnings that was exacerbated by low commodity prices and weak refining margins.