As we pass the halfway point of the second quarter U.S. equity earnings season, this week we are providing our assessment of the current earnings environment, evaluating the expectations for earnings in 2024, and examining if more fundamentally driven equity performance is possible, which we believe will be key if markets are to build on gains generated in the first half of the year.

Try as they might, the Federal Reserve has done little to slow the beat of U.S. economic growth.

It has been just under a year since Chairman Powell gave his curt “pain” speech at Jackson Hole, warning of the economic costs that would need to be endured in order to get inflation under control.

A year on, there is little evidence of that pain.

As we look into the back half of 2023, we can foresee a scenario where the market behaves like a duck. On the surface, the market may appear to be making little movement, plodding sideways, while under the surface we could see dynamic churning and rotations of market leadership.

As we highlighted in our mid-year outlook, one of the most surprising dynamics we have seen in 2023 is the surge in valuations back to pandemic-era levels, especially given the backdrop of elevated interest rates and hawkish Fed policy.

Another week, another string of better than expected data in the U.S., suggesting that forecasts for economic growth in the second half of 2023 remain far too low. It’s a growth party in the U.S.A.

In this piece, we revisit our thesis for the economy and markets from the beginning of 2023, identifying the divergence of equity valuations from yields/Fed policy as the key source of our surprise. We then look at the two main drivers of this yield divergence and equity strength (liquidity and AI optimism).

This week we are taking stock of the year-to-date performance of the U.S. equity market, which could be adequately summarized by Queen’s 1979 song, “Don’t Stop Me Now”, especially in the context of the recent 11% surge from the mid-March lows.

US equities were higher on the week and notched sizable daily gains on Friday. Growth-oriented indices like the NASDAQ and Russell 1000 Growth were again the biggest winners as the names that comprise these indices continued to shrug off higher real rates and expand valuation multiples.

Broad US equity indices marched higher on the Friday leading into Memorial Day Weekend, resulting in the S&P 500 notching a slight weekly gain while the tech-heavy NASDAQ and Russell 1000 indices produced weekly gains of 1.5% – 2.5%.