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Weekly Market Brief: July 24, 2023

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The Dow Jones Industrial Average has risen for 10 consecutive days, the longest stretch of gains since 2017. Over the last two weeks, the Dow has climbed 4.4% and pushed its year-to-date performance to 6.3%. The NASDAQ Composite was dragged lower last week as mega cap growth was pressured amid disappointing earnings results. Crude oil closed above $77, its highest since April. The US Dollar Index, meanwhile, rose 1%.

It's Fed week. Jerome Powell & Co. will almost certainly raise interest rates by 0.25% on Wednesday -markets are putting odds of the move at 96%. The real news will come at Powell's post meeting press conference, where investors will be searching for clues as to how FOMC members are thinking  about the path of rates for the rest of 2023. In the dot plot from the June Summary of Economic Projections, the median participant saw an additional hike by year-end as the most likely outcome. That was before CPI dropped to 3.0% last month, though. With inflation coming down more quickly than anticipated, the Federal Reserve could have what it needs to make this week's rate hike the final one of this tightening cycle.   

Earnings Expectations and Valuation

The stock market selloff in 2022 was not driven by a deterioration in corporate earnings. Though stock prices dropped well over 20% from their peak to trough, expected future earnings remained stubbornly high. That divergence pushed the S&P 500 forward price-to-earnings ratio from more than 20x (a level previously seen only during the late-1990s) to 15x (a level in-line with historical averages).

So far, 2023 has been the opposite experience: stock prices are rising, but earnings are not. Profits contracted for a second consecutive quarter - an event commonly referred to as an earnings recession - and they're on pace to decline again for the current reporting period. The result is that valuations are elevated once again: The S&P 500 trades at a forward multiple of nearly 20x.

What's Ahead