Executive Summary
Various key trends the Investment Office is monitoring
U.S. financials sector earnings season kicked off last week strong.
The MSCI EAFE Large Cap value index has nearly 37% weight to financials, which creates concentration risk.
This week we have Eurozone and U.S. preliminary PMIs, more S&P500 earnings releases including Google and Tesla.
Last week, stocks and bonds were mixed. The MSCI Emerging Markets outperformed the S&P 500 and MSCI EAFE index. The best performing sectors in the S&P 500 were technology, utilities, and industrials. Across U.S. style & market cap indices, mid-cap growth did the best, and the momentum factor led more broadly. As for fixed income, the 10 yr. Treasury yield rose 1 bp on the week to 4.43%. High yield bond spreads were flat on the week to 283 bps, but still well off recent highs of 453 bps.
Over the week, financials were the largest contributors to a tick higher of the Q2 overall S&P 500 blended earnings growth rate to 5.44% year over year, and the 2025 growth estimate is firming up to 9.2% vs 2024 earnings. We are seeing U.S. equities do a bit better than the MSCI EAFE to start the quarter as the earnings growth is appearing stronger (and while the U.S. dollar is still down -9.2% year-to-date it has found some support to start Q3).
The week had a couple of different vantage points on inflationary pressures; markets again are focused on tariffs more than shelter. The most recent NAHB housing market index showed that 38% of builders are cutting prices, the largest amount since they started tracking in 2022. The housing market is facing higher mortgage rates so far in July, where the 30 yr. fixed mortgage rate is back to 6.81%. We believe elevated mortgage rates are going to make it difficult for housing prices to recover.
The German ZEW index of economic sentiment in July rose for a third consecutive month, coming in at 52.7—its highest level since February 2022. Analysts in a FactSet survey had expected a reading of 50.2. The economic research institute said almost two-thirds of experts polled called for the economy to improve, thanks to potential stimulus and expectations for a speedy resolution to the European Union’s trade dispute with the U.S.
Finally, persistent weakness in China’s housing market has also renewed calls for more stimulus from the central government. New home prices in 70 cities nationwide fell 0.27% in June month on month, while values for existing homes fell 0.61%, the statistics bureau reported Tuesday. Residential sales dropped 12.6% in June from a year earlier, the sharpest decline this year, according to Bloomberg. The data showed that China’s property slump—now in its fifth year—continues to weigh on consumer demand.
Equities
The S&P 500 returned 0.6% and registered another all-time high mid-week on the back of signs that the economy remains in good shape. Strong retail sales numbers quelled concerns about a possible retrenchment in consumer spending, which a drop in weekly jobless claims indicated a resilient labor market. Strong earnings from major banks confirmed this view while an optimistic forecast from Taiwan Semiconductor Markets bolstered confidence in AI capital spending. Markets shrugged off a mini tempest midweek around the fate of Fed Chair Powell as President Trump stated he has no plans to fire him. Technology (+2.1%) and utilities (+1.6%) were the best performing sectors in the S&P 500; energy (-3.8%) and healthcare (-2.5%) were the laggards. EAFE markets returned -0.3% as the dollar appreciated 0.6% while EM markets returned 1.7% on the back of China (+3.8%).
From a valuation perspective, the S&P 500 and NASDAQ trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +2.1 and NASDAQ at +1.2. For the next 12 months, EPS growth for S&P 500 is expected to be 6.2% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 10.4% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as yields rose slightly at the long end of the curve. Municipals returned -0.9%, US AGG returned 0.0% and US IG returned +0.2%. HY bond returned +0.2% with spreads flat while bank loans returned +0.2%. EM debt returned -0.1% as the U.S. dollar rose 0.6%.
Rates
Rates rose slightly at the long end of the curve. The recession-watch 3M-10Y spread widened 1bp to +7. The 2Y-10Y spread widened 2bps to +54. Rates fell slightly in other developed markets other than the U.K.; the BTP-Bund spread is at 0.86%. 5-year breakeven inflation expectations rose 6bps to 2.52% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 3bps to 2.42% (vs. recent low of 2.03% on Sept 10); the 10Y real yield fell 3bps to 1.98%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.87% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.6%. The commodities complex rose 0.4% as energy prices fell 0.2% for the week. Brent prices fell 1.5% to $69/bbl. U.S. natural gas prices rose 7.6% while European gas fell 5.9%, both due to expectations for weather.
Market monitors
Volatility was unchanged for equities and fell slightly for bonds (VIX = 16, MOVE = 83); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) fell from 6 to 0.
Weekly Commentary
Investment Commentary – July 21, 2025
Stuart Katz
Executive Summary
Various key trends the Investment Office is monitoring
U.S. financials sector earnings season kicked off last week strong.
The MSCI EAFE Large Cap value index has nearly 37% weight to financials, which creates concentration risk.
This week we have Eurozone and U.S. preliminary PMIs, more S&P500 earnings releases including Google and Tesla.
Last week, stocks and bonds were mixed. The MSCI Emerging Markets outperformed the S&P 500 and MSCI EAFE index. The best performing sectors in the S&P 500 were technology, utilities, and industrials. Across U.S. style & market cap indices, mid-cap growth did the best, and the momentum factor led more broadly. As for fixed income, the 10 yr. Treasury yield rose 1 bp on the week to 4.43%. High yield bond spreads were flat on the week to 283 bps, but still well off recent highs of 453 bps.
Over the week, financials were the largest contributors to a tick higher of the Q2 overall S&P 500 blended earnings growth rate to 5.44% year over year, and the 2025 growth estimate is firming up to 9.2% vs 2024 earnings. We are seeing U.S. equities do a bit better than the MSCI EAFE to start the quarter as the earnings growth is appearing stronger (and while the U.S. dollar is still down -9.2% year-to-date it has found some support to start Q3).
The week had a couple of different vantage points on inflationary pressures; markets again are focused on tariffs more than shelter. The most recent NAHB housing market index showed that 38% of builders are cutting prices, the largest amount since they started tracking in 2022. The housing market is facing higher mortgage rates so far in July, where the 30 yr. fixed mortgage rate is back to 6.81%. We believe elevated mortgage rates are going to make it difficult for housing prices to recover.
The German ZEW index of economic sentiment in July rose for a third consecutive month, coming in at 52.7—its highest level since February 2022. Analysts in a FactSet survey had expected a reading of 50.2. The economic research institute said almost two-thirds of experts polled called for the economy to improve, thanks to potential stimulus and expectations for a speedy resolution to the European Union’s trade dispute with the U.S.
Finally, persistent weakness in China’s housing market has also renewed calls for more stimulus from the central government. New home prices in 70 cities nationwide fell 0.27% in June month on month, while values for existing homes fell 0.61%, the statistics bureau reported Tuesday. Residential sales dropped 12.6% in June from a year earlier, the sharpest decline this year, according to Bloomberg. The data showed that China’s property slump—now in its fifth year—continues to weigh on consumer demand.
Equities
The S&P 500 returned 0.6% and registered another all-time high mid-week on the back of signs that the economy remains in good shape. Strong retail sales numbers quelled concerns about a possible retrenchment in consumer spending, which a drop in weekly jobless claims indicated a resilient labor market. Strong earnings from major banks confirmed this view while an optimistic forecast from Taiwan Semiconductor Markets bolstered confidence in AI capital spending. Markets shrugged off a mini tempest midweek around the fate of Fed Chair Powell as President Trump stated he has no plans to fire him. Technology (+2.1%) and utilities (+1.6%) were the best performing sectors in the S&P 500; energy (-3.8%) and healthcare (-2.5%) were the laggards. EAFE markets returned -0.3% as the dollar appreciated 0.6% while EM markets returned 1.7% on the back of China (+3.8%).
From a valuation perspective, the S&P 500 and NASDAQ trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +2.1 and NASDAQ at +1.2. For the next 12 months, EPS growth for S&P 500 is expected to be 6.2% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 10.4% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as yields rose slightly at the long end of the curve. Municipals returned -0.9%, US AGG returned 0.0% and US IG returned +0.2%. HY bond returned +0.2% with spreads flat while bank loans returned +0.2%. EM debt returned -0.1% as the U.S. dollar rose 0.6%.
Rates
Rates rose slightly at the long end of the curve. The recession-watch 3M-10Y spread widened 1bp to +7. The 2Y-10Y spread widened 2bps to +54. Rates fell slightly in other developed markets other than the U.K.; the BTP-Bund spread is at 0.86%. 5-year breakeven inflation expectations rose 6bps to 2.52% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 3bps to 2.42% (vs. recent low of 2.03% on Sept 10); the 10Y real yield fell 3bps to 1.98%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.87% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 0.6%. The commodities complex rose 0.4% as energy prices fell 0.2% for the week. Brent prices fell 1.5% to $69/bbl. U.S. natural gas prices rose 7.6% while European gas fell 5.9%, both due to expectations for weather.
Market monitors
Volatility was unchanged for equities and fell slightly for bonds (VIX = 16, MOVE = 83); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) fell from 6 to 0.
Disclosure and Source
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