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Awaiting key earnings and next Fed rate hike, Wall Street continues win streak

Even though markets pulled out another winning week, recession and inflation worries are still nipping at investors’ heels.

MANHATTAN (CN) — Equities secured another positive week, albeit with a slight dip on Friday, as investors have based their trades on moderately positive earnings reports and the prospect of another aggressive interest rate hike next week.

All three indices finished the week in the black — mostly due to a tech rally on Tuesday — with the Dow Jones Industrial Average increasing 612 points since last Friday, the S&P 500 netting 98 points, and the Nasdaq gaining 382 points.

Corporate earnings helped drive the rally earlier in the week and likely will continue to keep stocks afloat throughout the summer. In its report, Tesla beat analyst expectations, while American Express saw a 31% increase in its second-quarter revenue.

“From a top line perspective, results have been good, not great,” James Vogt at Tower Bridge Advisors wrote in an investor’s note on Friday, adding key earnings reports from Google, Microsoft and oil giants are soon due. “Next week will be critical in determining the next phase of this bottoming process.”

Data this week, however, have experts again worrying about a recession. Unemployment insurance claims, not a major issue for months, increased to 251,000 claims for the week ending July 16, while continuing claims rose to 1.3 million for the previous week.

Unemployment claims typically increase in July as certain manufacturers lay off or furlough workers, but the numbers certainly justify opinions the U.S. economy is at least cooling if not at the precipice of a recession.

Other economic indicators also hint at an economic slowdown. The Conference Board’s leading economic index fell 0.8% in June after a similar decrease in May, though the index still is 4.2 points higher than it was in June 2019. The Conference Board noted it expects economic growth to continue to cool throughout the rest of the year and predicts a recession by the end of the year.

On Monday, the National Association of Home Builders’ announced that its builder confidence index plunged for July, falling 12 points to hit its lowest reading since May 2020. The trade group blamed production bottlenecks, rising home building costs, and inflation for the decline in confidence, noting 13% of respondents said they reduced home prices in the last month.

“Affordability is the greatest challenge facing the housing market,” NAHB Chief Economist Robert Dietz said in a statement. “Significant segments of the home-buying population are priced out of the market.”

Some analysts are even more concerned. “Most concerning, traffic of prospective buyers fell the lowest since May 2020, suggesting that the housing market has more downside to go as interest rates trek higher and inflation chisels away consumer purchasing power,” said Jeffrey Roach, chief economist at LPL Financial.

Roach contends that the residential real estate market is in a contraction, though he also notes that raw-material prices are falling from recent highs, which could mean better months ahead for builders.

The recent data points likely haven’t dissuaded the Federal Reserve from continuing to aggressively raise rates when the central bank meets next week, with many analysts predicting the Fed again will hike rates by 75 basis points at its July 27 meeting.

“Beyond [next week’s meeting], the key question is how quickly and how far the Fed will drive the policy rate into restrictive territory,” Kathy Bostjancic, chief U.S. economist at Oxford Economics, wrote in an investor’s note. “With inflation posted to remain about 9% [year over year] through September, we anticipate another 75bps rate increase in September, before the Fed starts to downshift to 25bps rate increases through early 2023.”

Though there is an outside chance of a 0.5% interest rate, most investors seem to have baked a 0.75% rate hike — as well as other potential bad news — into their trades. “The economy will most likely take the upcoming Fed rate hike in stride, but as the economy becomes more vulnerable, the probability of the Fed breaking something increases as the economy moves into 2023,” Roach said.

Yet it is also likely the Fed’s aggressive stance now will pay off in early 2023, with some predicting inflation to begin its sharp decline in March of next year.

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