The “Magnificent Seven” give the market a hard time

• The NASDAQ had a hard week, with some big tech companies disappointing.
• The Bank of Canada held tight.
• The American economy showed surprising strength.

Since its high on July 27, the S&P 500 has seen a massive $4 trillion wiped off its market value. This downturn came with a boost in bond yields, once again making it hard for prudent and moderate investors to dip their toes in the equity markets. This week did nothing to improve the situation, but it’s not all bad news out there. For instance, America's GDP defied expectations and recorded an impressive 4.9% rise. This statistic silenced the stagflation rumblings we’ve been hearing lately and provided yet more proof that the economy and the market are two different beasts.

The Bank of Canada (BoC) decided to keep its rates steady at 5%. To no one’s surprise, it reiterated its willingness to increase rates if necessary, should inflation persist. Since the Bank feels it necessary to give this reminder every time they take the stage, we propose another reminder: housing costs are now one of the main, if not the main, cause of inflation. Housing costs are driven higher by higher rates: because of this simple fact, we maintain that the rate hike cycle is over.

There was other interesting data in the Bank of Canada speech. Inflation predictions rose, and while growth outlooks for 2023 and 2024 decreased, those for 2025 saw a slight increase. The Bank anticipates inflation returning to its target by the end of 2025, rather than the previous estimate of mid-2025. There's still a 40% chance of a rate hike by March, according to money markets, but these predictions can be volatile. However, for those still holding on to that hope, BoC officials dismissed suggestions of imminent rate cuts. Governor Macklem forecast short-term negative growth for Canada but ruled out a severe recession.

Some international data came in this week from S&P Global and its Purchasing Managers’ Index. Overseas PMIs showed weakening, with Japan's composite index dropping to 49.9 and Australia's to 47.3. S&P Global said, "In the eurozone, things are moving from bad to worse... Overall, this points to another lacklustre quarter. We wouldn't be caught off guard to see a mild recession in the eurozone in the second half of this year." The manufacturing index fell to 43.

In the tech sector, there have been mixed reactions to corporate earnings. While Microsoft's strong financial results instilled hope, not all tech giants followed suit. Google's results fell short of expectations, casting a shadow over the market's outlook. Surprisingly, Meta saw a major stock dip despite posting commendable financial numbers. Such contrasting results from leading tech players further amplified the uncertainties and complexities of the current economic scenario. Bad news is not always bad, and good news is not always good enough. Still, in the backdrop of these developments, the all-important 10-year Treasury yield has been teetering close to the 5% mark without quite surpassing it. This level seems to have become a symbolic line in the sand for the financial markets. 

Listen to this week’s podcast for further insights.