Wall Street: A July rally amid inflation and earnings reports

July's US stock market performance

Last week proved to be a significant test for US stock indices, with crucial developments from the Federal Reserve (Fed) and the European Central Bank (ECB), a surprising tweak to the Bank of Japan's (BoJ) YCC (yield curve control), and earnings reports from approximately 50% of S&P 500 companies by market capitalization.

As the month comes to a close, the Nasdaq has achieved a solid 3.77% gain, the Dow Jones is up by 3.06%, and the S&P 500 has risen by 2.96%.

Factors driving the July rally

The positive momentum witnessed in July can be attributed to several factors. The US stock market saw a boost from stronger-than-expected growth data, better-than-expected corporate earnings, and a decline in inflation rates. The trend of decreasing inflation was further reinforced on Friday, as the Core PCE Price Index eased to 4.1% in June, compared to the expected 4.2%, leading to speculations of a "Goldilocks" scenario.

Crude oil price surge and inflation concerns

Despite the Goldilocks narrative, this month has also witnessed a significant surge in crude oil prices, rising by 14.2% to surpass $80 per barrel. With petrol costs already on the rise, there are concerns about the potential return of inflation fears and how long the current Goldilocks state can be sustained.

Key data releases and Q2 2023 earnings

Looking ahead, the US stock market is set for another crucial week, with the release of ISM (Institute for Supply Management) and Non-Farm Payrolls data, along with the continuation of Q2 2023 earnings reports from prominent companies like Caterpillar, Pfizer, AMD, and Amazon. Investors will closely monitor these developments for further insights into the market's direction.

ISM manufacturing survey expectations

Release date: Wednesday, August 2, 12:00 am AEST

The ISM manufacturing survey is expected to rise by 0.9 points to 46.9 in July. Despite the anticipated improvement, it would mark the ninth consecutive month the index has spent in contractionary territory (below 50).

Subindices to watch

Within the subindices, a modest increase in Prices Paid is expected to reach 43, up from 41.8 previously. The market will be closely monitoring New Orders for any signs of growth, hoping it can build on last month's gain, which rose to 45.6 from 42.6 prior.

ISM manufacturing PMI chart

S&P 500 technical analysis

Technically we moved to a neutral stance in the S&P 500 after the post-CPI rally tagged our 4600/4630 target/resistance zone.

We remain uninterested in chasing the rally at these elevated levels and note that a break of support at 4555/50 would indicate that a pullback towards 4500, with scope to 4400, is underway.

Aware that if the S&P 500 does break above the recent 4634 high before completing a pullback, there isn't much in the way of resistance until 4740 before the January 2022 high at 4808.

S&P 500 daily chart

Nasdaq technical analysis

In line with our view of the S&P 500, we aren't overly keen to chase the recent rally in the Nasdaq near cycle highs. Nor are we eager to fight the momentum. This leaves us neutral at current levels with a bias to buy a corrective pullback should it occur. A sustained break of support at 15,475 would be the first indication that a pullback is underway towards support coming in between 15,200 and 14,850.

Aware that if the Nasdaq were to break above the recent 15,857 high before completing a pullback, there isn't much in the way of resistance until 16,500.

Nasdaq daily chart

Dow Jones technical analysis

After its run of thirteen consecutive higher closes ended a prolonged period of sideways range trading, the Dow Jones is within eyesight of its all-time 36,952 high.

Dips are likely to find support back towards 34,500/250 (former highs), with a break above last week's 35,645 high an indication that the uptrend has resumed.

Dow Jones daily chart

• _{TradingView: the figures stated are as of July 31, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}