Shake It Off
Like Odysseus in Homer’s “The Odyssey” battling an array of obstacles and creatures, the stock market has been shaking off everything from war to inflation. The S&P 500 index has generated a 12% return so far this year, overcoming higher interest rates, energy prices and geopolitical turmoil. It certainly helped that companies just wrapped up a stellar second quarter earnings season. The last couple of weeks have been rocky, but may be the result of a post-earnings season hangover. Semiconductor stocks plunged more than 18% in late July, but have been recovering. Meanwhile, bond yields have been rising globally on inflationary concerns, which bears watching.

A Trojan Horse
Housing markets are generally treading water. Housing starts, which are a gauge of new residential construction, declined by 13% in July from the same month a year ago. Single-family starts decreased by about 16% while the multifamily sector, which includes apartment buildings and condos, decreased about 9%. The drop in single-family home construction is especially concerning given the persistent housing shortage in many markets. Meanwhile, residential permits, a measure of future construction, were up 5% at 1.4 million in July, which is a positive development.

Builders continue to face significant challenges from elevated construction costs and affordability pressures, according to the National Association of Home Builders. Higher mortgage rates are keeping many prospective buyers on the sidelines, while rising material, gas and diesel costs are adding to the cost of construction. These challenges are acting like a Trojan Horse, making it increasingly difficult for builders to deliver homes at prices that buyers can afford. Margin compression and lower earnings are the result, as we have heard from homebuilders recently.

Trapped on Calypso’s Island
Home Depot# and Lowe’s# seem to be trapped on Calypso’s Island, stuck in a stable but low-growth environment and unable to break free. Home improvement retailer Home Depot# reported comparable sales growth of 1.7% in its second quarter. The number of transactions at its stores decreased 0.8% while the average ticket rose 2.8% to $92.50. Home Depot reaffirmed its full year outlook for sales growth of 2.5% to 4.5% but with earnings growth stuck between zero and 4%. Lowe’s on the other hand reported comparable store sales growth of only 0.2% versus the prior year. The company trimmed its full year sales and profit targets, signaling that price-conscious homeowners are delaying major renovations.

On the construction front, luxury homebuilder Toll Brothers# reported lower year over year revenue and earnings for its latest quarter, but its outlook was stable. Signed contract values were up 5% over the prior year and prices in its backlog are averaging $1.2 million per home. However, margins compressed over the past year due to higher costs, and the company noted the resilience of its affluent customer base. Lower end builders may not fare as well.

The Earnings Odyssey
The greatest force behind stock markets right now is earnings, which is helping to overshadow concerns about Iran, inflation and AI capital expenditure spending viability. Collective S&P 500 profits for the three months ending in June are on pace to rise more than 30% from last year. Of the more than 90% of the companies in the S&P 500 that have reported so far, 76% have topped forecasts, the best beat rate in five years. The S&P 500 is on pace for four consecutive quarters of 20%-plus annual earnings growth, a streak which has occurred only 10 times in the past 90 years.

Stocks have responded in kind, with the S&P 500 Index up 12% year to date and near all-time highs. The march higher in bond yields globally has slowed the market’s enthusiasm somewhat, and puts equity markets on watch. We still have to navigate September and October, which are the Scylla and Charybdis of stock market seasonality. Meanwhile, Federal Reserve Chair Kevin Warsh will be attempting to slay the inflation beast at Jackson Hole next week, while keeping one large eye on the labor markets. Hopefully, calmer waters lie ahead, but higher interest rates remain the biggest short-term risk to markets.

Former President Bill Clinton turns 80 today, actress Kyra Sedgewick turns 61, and actor John Stamos turns 63. That is a full house.

Christopher Crooks, CFA®, CFP® 610-260-2219

Tower Bridge Advisors manages over $1.5 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

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