Weekly Market Trends: Markets Rise, Another Rate Hike Looms

Markets rose as geopolitical unrest continued. Amid the volatility, can investors find growth at a reasonable price? Semiconductor may be an option, as valuations look increasingly attractive.

Head of SPDR Americas Research

This article was written with contributions from Martin Dunn. Marty is a Research Analyst on the SPDR Americas Research Team.

Markets Climb Higher Amid Continued Geopolitical Unrest

Last week, equities rose across nearly all major regions and styles. Large-cap growth outperformed, while value stocks lagged.1 Fixed income also increased, as the US 2-year Treasury yield rose 27 basis points (bps), settling at a 10-year high of 3.10%.2 June FOMC meeting minutes reveal another rate hike is likely to come later this month in the range of 50 to 75 bps.

It was against the backdrop of continued geopolitical unrest that markets climbed higher. After a string of ethics scandals in the UK, more than 50 MPs quit in a revolt against Prime Minister Boris Johnson, resulting in his resignation last Thursday. Then on Friday, Former Japanese Prime Minister Shinzo Abe shockingly was shot and killed during a campaign event. Looking ahead, the Nord Stream 1, a key European gas pipeline, is scheduled to close for 10 days for routine maintenance. German officials are concerned that Moscow may not reopen the pipeline, potentially causing a substantial shock to Germany’s economy.

China Concerned About Economic Growth

China’s Ministry of Finance is increasingly concerned about economic growth. To stimulate the economy, it is considering fast-tracking a program that would allow local governments to sell $220 billion in bonds for infrastructure projects. China is also discussing economic sanctions with the US, amid reports that the Biden administration may be considering rolling back some of the Trump-era trade tariffs.

Prices Expected to Hold and Jobless Claims to Fall

Despite unsteady economic conditions and market turbulence, economists are forecasting that US Consumer and Producer Price Index data released this week will hold near current levels. Also, US initial jobless claims to be released Thursday are expected to fall slightly from 235k to 210k, as the labor market continues to be unaffected by ongoing economic uncertainty.

Semiconductors: Cheap Chips?

Amid volatile equity markets, can investors find growth at a reasonable price?

Semiconductor valuations look increasingly attractive:

  • Semiconductors currently trade 22% below their 15-year median on a forward P/E basis.3
  • In contrast, the broader tech sector and the S&P 500® Index are trading at a premium relative to their long-term medians.4
  • Earnings estimates are expected to dramatically outpace the broader tech sector and US large caps in Q2 (17.27% versus 1.22% and 4.99%, respectively).5

Chips have become critical components of both cutting-edge technologies and everyday items. Benefitting from rising demand for “smart” devices, semiconductor revenue is expected to hit $661 billion this year (13.7% year-over-year growth).6 In fact, McKinsey projects that global semiconductors will become a $1 trillion market ($590 billion as of end of last year) by 2030.7

Implementation Idea: SPDR® S&P® Semiconductor ETF (XSD)

The SPDR® S&P® Semiconductor ETF (XSD) may enable investors to capitalize on this high-growth trend with structural tailwinds. The projected 3-5 year EPS growth for the semiconductor industry is considerably higher than that of the tech sector and broader equities while boasting constructive valuations (see chart). This yields an attractive entry point for those seeking growth at a reasonable price, as the bottom line for semiconductors appears stable — relative to its sector and broader US equities — despite unsteady economic conditions.

Source: FactSet, as of July 6, 2022. The above estimates are based on certain assumptions and analysis made by FactSet. There is no guarantee that the estimates will be achieved. Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

XSD Standard Performance as of June 30, 2022

XSD Standard Performance as of June 30, 2022

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