Weekly Investment Perspective

U.S. equities posted their strongest week since April, with all three major indices advancing sharply and the S&P 500 closing at a fresh all-time high. For the week, the S&P 500 rose 3.58%, the Nasdaq Composite gained 5.19%, and the Dow Jones Industrial Average added 2.96%, while the Russell 2000 gained 3.52%. Participation improved, with advancing stocks outnumbering decliners by more than 2-to-1 in the S&P 500, although technology and other momentum-oriented stocks drove an outsized share of the advance. Nvidia and Microsoft rose 11.6% and 7.6%, respectively, as semiconductor and software shares rebounded sharply. Much of the strength appeared to be a reversal of the late-July momentum unwind, supported by well-received earnings, rather than a sudden change in the fundamental outlook.

Elsewhere, energy stocks declined as crude oil prices fell nearly 8%, marking a second consecutive weekly decline despite continued volatility surrounding the Iran conflict and difficult negotiations over reopening the Strait of Hormuz. Treasury yields also moved lower following Friday’s employment report.

The week's most significant economic release was the July employment report, which showed that nonfarm payrolls unexpectedly declined by 23,000 – the first monthly drop since February and well short of expectations for an 80,000 increase. Job gains for the prior two months were also revised sharply lower by a combined 103,000. The unemployment rate ticked down to 4.1%, but largely because fewer people were actively participating in the labor force rather than because of stronger hiring. Although a drop in local government education employment accounted for much of the headline decline, private payrolls rose just 30,000, three-month job growth averaged only 20,000, and annual wage growth slowed to 3.2%, below the latest inflation rate.

The employment report sharply reduced expectations for a near-term rate increase but did not resolve the Fed's inflation concerns. Several officials emphasized that further tightening remains possible if price pressures persist, while Chair Warsh offered little clarity on what would prompt the next move beyond reaffirming the Fed's 2% inflation target.

Elsewhere, economic data was mixed but generally constructive as the July ISM manufacturing and services surveys point to an economy entering the third quarter with demand still firm but hiring and wage growth cooling. Manufacturing reached a four-year high as production, orders, and backlogs strengthened, while services activity and new orders were stronger than the headline suggested even as employment contracted. Price pressures remained widespread across both surveys. That is not a recessionary signal, but it leaves the Fed with an uncomfortable combination of softer hiring and persistent inflation.

Oil's decline reflected hopes of easing hostilities, but weekend developments showed that reopening the Strait of Hormuz remains uncertain. Iran set broad demands including sanctions relief and U.S. troop withdrawals, while the United Arab Emirates reported that an Iranian missile struck a tanker affiliated with its state oil company. Renewed disruption remains a risk even if both sides prefer to avoid a major re-escalation.

Second-quarter earnings season continued to deliver strong results, with roughly 88% of S&P 500 companies having reported. Blended year-over-year earnings growth stands at an impressive 50.4% per FactSet, well ahead of pre-season expectations, though a large share of that strength is concentrated in a small number of mega-cap reports. However, the index earnings are still tracking towards 30% even when excluding outlier reports from Amazon and Alphabet, and revenue growth has also been solid, at roughly 15.0%. Notably, while the magnitude of earnings beats has been above historical norms, markets have rewarded those beats by a smaller-than-usual amount, suggesting expectations were already running high.

The combination of a fresh equity high, strong business activity, and weak hiring captures the market's current tension. Softer labor data reduced the immediate risk of a rate increase, while strong earnings and continued demand supported the growth outlook. Persistent price pressure, however, would leave the Fed little room to respond if labor conditions weaken further.

Economic data for the week ahead will be headlined by the July CPI report on Wednesday and retail sales on Friday. CPI will test whether the price pressure evident in the ISM surveys is carrying into broader inflation, while retail sales may show whether slower job and real wage growth is beginning to weigh on consumers.

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