S&P 500 Hits Record High: Are stock prices looking a bit pricey?

The month of July marked a significant milestone for global financial markets, with the S&P 500 reaching a new all-time high, hitting 6,389 points for the first time in its history. This exceptional performance was driven by a combination of favorable factors: strong corporate earnings, declining inflation, and robust economic data in the United States.

Despite the initial optimism, the end of the month showed signs of a slowdown. Many investors began to question whether stock valuations had become excessively high. Even with this caution, the index has reported a gain of over 8% for the year.

The second-quarter earnings season began, as usual, with results from major U.S. banks: all 17 leading banks that reported their numbers exceeded profit expectations, demonstrating the strength of the financial sector.

However, only 7 institutions saw their stock prices rise in the trading session following the announcements. This seemingly paradoxical phenomenon highlights that the market had already priced in positive results, diluting the impact of favorable surprises.

Tech giants that have already reported their numbers also delivered solid performances, helping keep Nasdaq near record highs and reinforcing confidence in the sector as a driver of economic growth.

For the fifth consecutive month, U.S. inflation came in below expectations. The main source of relief was lower automobile prices, which contributed to the slowdown in the consumer price index.

Despite the favorable scenario, expectations for interest rate cuts by the Federal Reserve (the U.S. central bank) remained relatively unchanged, signaling that the Fed will maintain its cautious stance.

Anonymous White House sources indicated that the dismissal of Jerome Powell, the Fed Chair, by President Donald Trump was under discussion. The rumors triggered an immediate market reaction.

In the meantime, economic indicators were affected: the dollar fell nearly 1%, gold rose 1.5%, and 30-year Treasury yields jumped by 5 to 6 basis points. The episode reignited concerns about the central bank’s independence, a sensitive issue that even prompted the IMF to issue warnings about the risks of future instability.

In Asia, the Chinese economy reported good numbers. Retail sales, industrial production, and GDP all exceeded expectations, easing fears of a global slowdown, especially considering ongoing issues in the real estate sector.

Regarding foreign trade, the deadline for implementing the announced tariffs was postponed to August 7. The U.S. announced new tariffs on imports from Mexico and Canada, although sectors covered by the USMCA were spared.

With markets at elevated levels and the political environment still unstable, August promises to be a decisive month. Five key themes should be on investors’ radar:

1. Tariff implementation: If President Trump imposes tariffs on Mexico, Canada, or China, we could see more volatility.
2. The Fed: The minutes from the July meeting will be closely scrutinized, especially the dissenting votes that called for a rate cut.
3. U.S. inflation and employment: These data points remain the most important. If inflation continues to decline, it could open the door for rate cuts later this year.
4. Earnings season: More companies will report their Q2 results. If profits are strong but stock prices don’t respond, it could be a sign that the market is already overpriced.
5. International backdrop: China and Europe remain on the radar. Stimulus decisions or rate cuts in those regions will also influence global markets.

Despite political tensions, trade uncertainties, and questions about monetary policy, global markets remained resilient in July, supported by strong economic fundamentals.