Equity Markets – Take These Broken Wings
Equity markets recovered this week after selling off earlier in the month. The S&P 500 rose 1.8%, while the NASDAQ gained 1.5%. The Magnificent 7 outperformed the core benchmark, rising 2.4%. Small caps continued their rally, gaining 3.1% for the week. Bond indices gained 1.4%, as well during the week.
Economic Signals Point to a Soft Landing
The first print of second quarter Gross Domestic Product (GDP) growth came in higher than expected, up 2.8% versus forecasts of 1.9% and double that of the previous quarter’s GDP growth of 1.4%. Increased spending by both government and the consumer was a key factor in the surprise figure.
Additionally, a key inflationary metric monitored by the Fed, the Core Personal Consumption Expenditures Price Index Deflator, came in at a 2.6% year-over-year increase, essentially in line with expectations. This metric excludes the volatile food and energy categories and has been declining since early 2023.
The Federal Reserve at their latest meeting this week announced they held the key lending rate unchanged. However, Fed Chair Powell stated that if the data from recent economic releases continues on its current path, a rate cut in September could be on the table. A potential “soft landing” is expected to benefit equities.
The employment picture in the United States continues to be relatively strong. The number of job openings, as measured by the Job Openings and Labor Turnover Survey (JOLTS) economic release, came in higher than forecasted, with approximately 8.2 million available positions. The most recent JOLTS number shows that there remains a solid demand for workers, however, this number has been declining since its peak in March 2022 when there were 12 million job openings.
Quarterly Earnings Season Strong for Large Caps
We find ourselves in the midst of earnings season, and results within large cap stocks have been relatively strong. With just under half of the S&P 500 reporting, almost 80% of companies have beat analysts’ expectations, with the Health Care and Materials sectors leading the way with regard to surprising on the upside. Second quarter earnings growth (compared to one year ago) is expected to come in at 12.1%, higher than was forecasted at the beginning of July, driven primarily by the Health Care and Communication Services sectors.
Earnings results, however for small cap stocks have been somewhat disappointing. With approximately just over 10% of the Russell 2000 small cap index reporting, second quarter earnings are thus far coming in 14.1% less than one year ago.
There have been some concerns regarding the recent small cap rally and whether it would be considered a “junk” rally with investors potentially eschewing quality of earnings and instead focusing entirely on a rotation out of large cap stocks.
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Sources: BTC Capital Management, S&P Dow Jones Indices, IHS Markit, FactSet
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