Global stock markets experienced a robust rally, with the S&P 500 reaching a new record high of 7,737 after a 1.8% rise, and the Nasdaq Composite gaining 2.6%. This surge was attributed to several factors, including stronger-than-expected corporate earnings, with approximately 80% of S&P 500 companies surpassing expectations, compared to a historical average of 73%. The median earnings beat was 5.8%, exceeding the historical 3.5%. AI-related demand was a significant driver, with companies like Palantir raising revenue forecasts and Caterpillar lifting its outlook due to data-center construction. Microsoft also reported accelerated cloud growth.
Easing geopolitical tensions, particularly regarding the Strait of Hormuz, played a crucial role. Progress towards reopening the waterway, confirmed by Qatar and optimistic statements from US and Iranian officials, led to a significant drop in Brent crude oil prices to below $80/bbl, a 5.3% decrease. This helped alleviate inflation concerns; the US one-year inflation swap fell to 1.80%, its lowest since 2024, and the yield on 10-year US Treasuries dropped below 4.60%. Morningstar Wealth's Dominic Pappalardo noted that "Waning inflation fears translate into lower interest rates."
A patient Federal Reserve also contributed to market confidence, maintaining the federal funds rate at 3.50-3.75%. Core CPI inflation slowed to 2.6% in June, and labor-income growth suggested moderate consumer spending. These conditions provided the Fed with room to assess whether inflation was sustainably returning to its target. UBS Global analysts believe these drivers, coupled with a resilient US economy, will sustain the equity market rally. The ISM Manufacturing PMI also rose to 55.6 in July, indicating a seventh consecutive month of expansion, further supporting a broader equity rally beyond mega-cap tech stocks.
