US equities kick of July with gains

US equities ended a choppy session higher on Friday, as equities steadied after their worst start to the year in decades. The S&P 500 rose by about 1.1% to end at 3,825.33 after fluctuating between gains and losses throughout the session. The Dow Jones Industrial Average added 322 points, or 1.1%, while the Nasdaq Composite gained 0.9%.

The moves came following a mixed set of economic data Friday morning, which offered some evidence of further softening in key sectors of the economy. S&P Global’s final manufacturing purchasing managers’ index (PMI) for June was revised up to 52.7, which was still the lowest since July 2020, but better than the 52.4 previously reported for the month.

The Institute for Supply Management’s manufacturing index dipped more than expected to 53.0 for June from 56.1 in May, as an index tracking new orders contracted for the first time in two years to signal further demand softening in the economy.

Markets are limping into the third quarter and second half of the year amid widespread concerns over whether the economy can remain resilient in the face of inflation and the Federal Reserve’s aggressive response to inflation. The S&P 500 closed out its worst first half of the year since 1970 on Thursday, sliding more than 20% in the first six months of 2022.

With signs of a slowdown in US growth mounting in both the economic data and in company results and anecdotes, Fed officials have so far telegraphed they would allow the economy to continue softening to a degree if it meant achieving their current primary goal bringing down inflation.

Semiconductor bellwether Micron Technology on Thursday offered a current-quarter sales forecast that came in far below Wall Street’s estimates, suggesting customers were pulling back on ordering memory chips widely used in computers and smartphones in anticipation of weakening demand among consumers. And just a day earlier, furniture company RH slashed its own revenue forecast, citing a “deteriorating macro environment.”

Inflation, especially for essentials like gas and food, has remained elevated, pressuring consumers’ propensity to spend. Real personal spending fell more than expected as of May, new data this week showed. But the full impact of inflation on corporate profits has likely not been fully reflected in earnings estimates to date, many strategists have argued, suggesting further volatility for equities. The next quarterly reporting season is set to pick up in the middle of July.

Inflation right now is on the minds of everyone, whether it’s a consumer, corporation, and policy makers. But after that, it is really earnings. So far, earnings estimates haven’t come down at all.

The next catalyst for markets “could be earnings, once we start getting some earnings downgrades, which are expected. Right now, a recession is not priced into future earnings. That is going to happen. Markets could see some pickup in volatility or some more sell-offs once we start getting into earnings season and to more downgrades.