By Tristan Detzel, CFA, Advisory Portfolios Strategist
Print This Post
It was a rather tumultuous week as investors responded to a better-than-expected gross domestic product (GDP) print, numerous notable earnings results and Friday’s Personal Consumption Expenditures (PCE) Index release. For the week, the S&P 500 Index (SPX) and NASDAQ Composite Index (COMP) declined 0.83% and 2.08%, respectively, while the Dow Jones Industrial Average (DJIA) added 0.75%. Wednesday marked the largest daily drop in the NASDAQ since 2022. The week was marred by volatility, but Friday’s PCE inflation report helped turn a rough week around as every industry sector in the S&P 500 ended Friday higher. On a brighter note, the Russell 2000 Index of small-cap stocks (RUT) logged its third straight week of gains and returned 1.78% on the week. On the fixed-income side, the 2-year Treasury note declined 13 basis points (bps), and the 10-year fell just 4 bps.
The S&P 500 Index has declined so far in July, with the Magnificent 7 (Amazon, Alphabet, Meta, Apple, Tesla, Microsoft and Nvidia) driving the move lower, given a recent pullback in big technology. Last week, the best-performing sectors were utilities (+1.47%), healthcare (+1.41%) and materials (+1.37%); underperformers included communication services (-3.76%), technology (-2.44%) and consumer discretionary (-2.31%).
For the past 18 months, there has been one constant in global equities, and that is the resilience and dominance of technology stocks associated with the optimism surrounding artificial intelligence (AI). Suddenly, it appears there may be cracks in this narrative as a high earnings-expectations bar and rich valuations suggest downside potential. Market participants showed their disappointment with Alphabet (GOOG) and Tesla (TSLA) earnings results. Tesla’s second-quarter (Q2) earnings were down 45%, and Alphabet posted higher-than-expected capital expenditures driven by massive investments in AI capabilities. GOOG and TSLA lost 6.0% and 8.1%, respectively, last week. These disappointing results contributed to a 2.3% loss for U.S. large-cap equities last Wednesday. According to Zacks Investment Research, the “Mag 7” is expected to generate +26.8% more earnings relative to the same period last year on +13.7% higher revenues. Through all the results that came out on Friday, July 26, we have seen Q2 results from 207 S&P 500 members, or 41.4% of the index’s membership. Total earnings for these 207 index members are up +0.6% from the same period last year on +4.9% higher revenues, with 79.7% beating earnings-per-share estimates and only 57.5% able to beat revenue estimates.
In the past three weeks, small-cap stocks have surged by over 11%. With the resurgence in small-cap stocks over recent weeks, it appears investors have continued their hunt for value, as the rally has spread to banks, utilities and manufacturers. This theme will likely continue to pick up steam as investor optimism toward interest rate-sensitive industries and companies increases ahead of a potential U.S. Federal Reserve (Fed) rate cut in September. Markets have continued their rotation in size and style with the Russell 1000 Growth declining 2.37%, while the Russell 1000 Value was up 1.23% on the week.
The June PCE data, the Fed’s preferred inflation gauge, was well-received on Friday, as it reinforced the current rate-cut narrative. Core PCE, which excludes food and energy, increased 0.2% month over month and 2.6% year over year, while the headline print increased 0.1% month over month and 2.5% year over year. These June prints mark the Fed’s progress in taming inflation since 2022, when the annual rise in the PCE index reached 7%. The Federal Open Market Committee has held its target for the federal funds rate at a range of 5.25% to 5.5% since July 2023. The futures market has implied overwhelming odds of a highly anticipated quarter-point reduction in the target at the committee’s September meeting. Although a July rate cut cannot be entirely ruled out, a pause until September still appears to be the most probable outcome.
With regard to personal income, June’s print displayed slight deceleration versus May, but was still moving higher at 0.2%. Personal spending modestly decelerated in June relative to May with an increase of 0.3% versus May’s 0.4%, and personal savings hit its lowest level since December 2022 at 3.4%. Following this trend, a recent report for the Philadelphia Fed showed that credit card delinquencies have now reached their highest level in nearly 12 years. The rise in consumer credit usage and debt is quite alarming, especially considering the average credit card annual percentage rate is over 20%.
Another notable data release this week was Thursday’s Q2 GDP print, which marked a sharp acceleration from the first quarter. Consumers increased their spending, businesses spent more on equipment and inventories, and inflation cooled. Q2 GDP rose at an annual rate of 2.8%, which was well above both the 2.1% forecast and the 1.4% pace in the first quarter. Over half of this growth was led by consumer spending, a positive sign at this point in the economic cycle. This robust GDP figure hints to the U.S. economy operating in a “Goldilocks zone,” where steady growth remains balanced with price stability. Treasury Secretary Janet Yellen saw the GDP report as “affirming the path we’re on to steady growth and declining inflation” in remarks she delivered Thursday morning.
Aside from PCE and GDP, there were also updates on Purchasing Managers’ Index (PMI), durable goods orders and the housing market. July PMIs for manufacturing and services sectors were contradictory, with manufacturing declining into contractionary territory, while services increased at the highest rate since March 2022. The decline in the manufacturing sector was driven by sharp decreases in new orders, falling production levels and slower employment growth. The acceleration within the services sector was driven by inflows of new business and employment growth. This widening gap between the two sectors highlights the uneven nature of the current economy amid strong overall growth. In the housing market, both new and existing home sales came in below expectations and showed a decline month over month.
It’s an exciting time in the world of sports as the 2024 Paris Olympics kicked off last week. As I’m sure you’ve heard, the controversial Olympics opening ceremony caused quite the stir as many unique, and somewhat questionable, undertones drew criticism worldwide. This drama aside, Team USA is off to a blistering start in the Paris games, with the first gold medal coming in the men’s 4×100 meter freestyle relay. At the time of this writing, the United States leads the overall medal count (12) with three gold, six silver and three bronze.
All attention this week will be directed to the Fed’s July 30-31 meeting and Chairman Powell’s press conference. Investors largely expect the Fed to leave its policy rate unchanged, and most of the attention will be on the degree to which the central bank sets the stage for a rate cut at its next meeting in September. Other notable economic data releases in the coming week include Thursday’s July manufacturing PMI and Friday’s July jobs report. The Q2 reporting cycle ramps up, with more than 1,000 companies reporting, including 170 S&P 500 constituents. Four members of the Magnificent 7 stocks are reporting this week with Microsoft (MSFT) on Tuesday, Meta Platforms (META) on Wednesday, followed by Amazon (AMZN) and Apple (AAPL) on Thursday.
| This Week’s Major U.S. Economic Reports & Fed Speakers | ||||
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
| MONDAY, JULY 29 | ||||
| None scheduled | ||||
| TUESDAY, JULY 30 | ||||
| 9:00 AM | S&P Case-Shiller home price index (20 cities) |
May |
— |
7.20% |
| 10:00 AM | Consumer confidence |
July |
99.5 |
100.4 |
| 10:00 AM | Job openings |
June |
8.0 million |
8.1 million |
| WEDNESDAY, JULY 31 | ||||
| 8:15 AM | ADP employment |
July |
168,000 |
150,000 |
| 8:30 AM | Employment cost index |
Q2 |
1.00% |
1.20% |
| 9:45 AM | Chicago Business Barometer (PMI) |
July |
44 |
47.4 |
| 10:00 AM | Pending home sales |
0.80% |
-2.10% |
|
| 2:00 PM | FOMC interest-rate decision | |||
| 2:30 PM | Fed Chair Powell press conference | |||
| THURSDAY, AUG 1 | ||||
| 8:30 AM | Initial jobless claims |
27-Jul |
233,000 |
235,000 |
| 8:30 AM | U.S. productivity |
Q2 |
1.70% |
0.20% |
| 9:45 AM | S&P U.S. manufacturing PMI |
July |
— |
51.6 |
| 10:00 AM | ISM manufacturing |
July |
48.80% |
48.50% |
| 10:00 AM | Construction spending |
June |
0.20% |
-0.10% |
| FRIDAY, AUG. 2 | ||||
| 8:30 AM | U.S. employment report |
July |
190,000 |
206,000 |
| 8:30 AM | U.S. unemployment rate |
July |
4.10% |
4.10% |
| 8:30 AM | U.S. hourly wages |
July |
0.30% |
0.30% |
| 8:30 AM | Hourly wages year over year |
3.70% |
3.90% |
|
| 10:00 AM | Factory orders |
June |
-3.10% |
-0.50% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market