Weekly Update (07/31 – 08/06): Quietly Slipping into Expansion

Hi all –

We hope you are enjoying what's left of summer! We wanted to send out an update on what we are seeing in markets entering this week.

Last week, we got promising news on the inflation front. Core PCE inflation (i.e., the Fed’s preferred inflation metric) fell to the level of 4.1% (measured Year over Year), which is down from the 4.6% reading in the prior month.

The Fed delivered another 25-basis point rate hike last week. The market seemed to take this information in stride, as it had priced in a 98% probability of the Fed hiking rates at the meeting.

Last week showcased a continuation of S&P 500 second-quarter earnings season. By Friday, 50% of the S&P 500 had reported results, with 80% of those companies exceeding their earnings expectations, and 64% exceeding revenue projections. Despite the positive surprises, the blended earnings rate for the quarter is still -7.3%; which, if it holds, will mark the lowest quarter since the same quarter in 2020 when earnings fell over 30%.

“Under the hood” of earnings, we see a stark divergence geographically. Firms who generate more than 50% of their profits from within the US grew by +.4%. While those with 50% from outside the US saw their earnings fall around 20%. This information makes sense given the reality of a weakening China, and a European continent still struggling with growth.

On the topic of China, they seem to be “exporting deflation,” in other words it is likely that inflation in the US might be worse had it not been for the fact that China’s economy is suffering.

Back to the topic of earnings, we are seeing massive “COVID & Ukraine distortions” rolling through the S&P 500 and skewing results. The -20% average earnings of companies reporting with >50% earnings generated abroad, contained five companies which, if excluded, would bring the average earnings growth from this bucket of companies to -.7%; Chevron, Exxon, Merck, Moderna, Pfizer. The two energy companies benefited from the high price of energy caused by the Ukraine war. The other three companies benefited disproportionately from the COVID vaccines, tests, and other COVID-related (in our view non-repeating) distortions rippling through the healthcare sector.

The overall pattern is that the US economy is strong. GDP came in at 2.4% for the quarter. However, if we look at GDP Now, this estimate is now pegging US growth at 3.5%. Anything but recessionary! GDPNow- Federal Reserve Bank of Atlanta (atlantafed.org)

We view these mixed data as masking underlying strength in the US economy and are emblematic of US pre-eminence. Furthermore, since we do not see the types of excesses in the economy which have been present at the end of other cycles, it seems more likely we are in a new bull market. The small caveat is the commercial real estate sector, which may be due for more pain.

However, since this sector is dominated by small/ regional US banks, we view this sector as not “big enough” to possibly bring down the entire economy.

We wanted to point out that August is seasonally a very weak month in the stock market due to the fact that many in the financial industry tend to go on vacation, and liquidity becomes more challenging.

Earnings this week will be meaningful with Amazon and Apple reporting on Thursday.

The 2^nd half of a third-year of a presidential cycle tends to get 4-5% type of returns.

Closing Thoughts: as second quarter earnings come to an end, the market will be searching for a new catalyst. In the absence of anything obvious, we believe the upward inertia of the market could continue.

As always, please do not hesitate to reach out to us with questions. Thank you for your trust and confidence.

John Bay, CFA, UCLA MBA

Chief Market Strategist

Meet the Marathon Team

Charles G Brown, IV | Chief Executive Officer, Financial Advisor | cgbrown@meetmarathon.com

Jacob Foley | Chief Operating Officer | jfoley@meetmarathon.com

Connor Gallivan | Financial Advisor | cgallivan@meetmarathon.com

Indrani Namilikonda | Client Services Coordinator | inamilikonda@meetmarathon.com

REQUIRED DISCLOSURE:

Investment advisory services provided by NewEdge Advisors, LLC doing business as Marathon Financial Group, as a registered investment adviser. Securities offered through NewEdge Securities, Inc., Member FINRA/SIPC. NewEdge Advisors, LLC and NewEdge Securities, Inc. are wholly owned subsidiaries of NewEdge Capital Group, LLC.

The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying to this message is strictly prohibited. If you have received this message in error, please immediately delete.