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Fundamental Analysis

Equities Surge on Improved Sentiment Amid Earning Reports, Looming Fed Meeting

  • The Dow Jones Industrial Average achieved its longest winning streak in six years.
  • A survey revealed a slowdown in July’s US business activity.
  • The Federal Reserve will likely lift rates by 25bps on Wednesday. 

On Monday, the Dow Jones Industrial Average led the upward trend on Wall Street, achieving its longest winning streak in six years. Investors showed confidence in various sectors, not just technology, amidst a week filled with earnings reports and a Federal Reserve meeting. They are eagerly anticipating the earnings of Microsoft, Google-owner Alphabet, and Meta Platforms this week to assess whether their stocks’ high valuations are justified.

Throughout the year, the tech-heavy Nasdaq Composite Index surged by 34.3%, outperforming its peers, as investors favored mega-cap growth companies sensitive to interest rates. They were optimistic about artificial intelligence advancements and the potential end of the Fed’s tightening cycle. 

However, the Nasdaq trailed behind other indexes as investors sought bargains in non-tech stocks, boosting sectors like energy and banks.

Chevron played a role in the Dow’s impressive winning streak by gaining nearly 2%. This was driven by the company’s positive preliminary quarterly earnings announcement over the weekend.

US business activity (Source: S&P Global)

US business activity (Source: S&P Global)

On the data front, investors seemed to overlook a survey revealing a slowdown in July’s US business activity. The slowdown was primarily due to decelerating service-sector growth.

According to Carol Schleif from the BMO Family Office, there’s a growing belief in the possibility of a soft landing and a more dovish Fed stance. This encouraged some sidelined cash to flow back into stocks.

The Federal Reserve will likely lift rates by 25 basis points at its upcoming policy-making meeting on Wednesday. Most economists surveyed by Reuters expect this to be the final hike of the current tightening cycle, mainly due to recent data indicating signs of disinflation.

Elsewhere, European equities experienced slight gains, primarily driven by energy firms and telecom stocks. However, these gains were offset by growing concerns about a recession in the Eurozone and losses in Spanish stocks following the inconclusive results of the country’s general election.

However, the broader pan-European STOXX 600 managed a modest increase of 0.1% and remained close to its five-week highs.

Markets have already factored in an anticipated quarter percentage point increase in interest rates to 3.75% by the European Central Bank later this week. However, there is uncertainty surrounding the ECB’s course of action after July.