- Stocks close higher – Major equity markets closed higher, with large-cap stocks leading small- and mid-cap stocks*. Sector performance was broad, as consumer discretionary and industrial stocks led to the upside. Bond yields edged higher, with the 10-year Treasury yield at about 3.91%. In global markets, Asia was up, while Europe was mixed, as eurozone inflation continued to moderate. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil and gold traded lower.
- Key inflation measures hold steady – The Federal Reserve's (Fed) preferred inflation measure, the core personal consumption expenditure (PCE) price index, which excludes more volatile food and energy prices, rose 2.6% annualized through July, below estimates for 2.7%* but flat the prior month**. While the reading remains above the Fed's 2% target, the month-over-month change has been below 0.2% for the past three months, which would be about in line with the target on an annualized basis. Headline PCE also held steady at 2.5% year-over-year, below expectations for a 2.6% rise*. The Fed announced last week its intention to start cutting interest rates in September. With the Fed's dual mandate (maximum employment and stable prices) coming into better balance in recent months as the labor market gradually cools and inflation moderates, we believe the Fed remains on track to start a rate-cutting cycle that will likely continue for several meetings. Bond markets are currently pricing in expectations for 2.0% of Fed interest-rate cuts over the next 12 months***.
- Consumption higher than expected – Consumption expenditures rose 0.5% in July month-over-month, above estimates and June's reading of 0.3%**, reflecting a resilient consumer. Personal income grew 0.3%, also above expectations and the prior month**. Consumption likely won't be sustained at July's pace, in our view, as it exceeded income growth. We expect consumers to resume gradually pulling back on consumption over the coming months, which would still be supportive of economic growth, though likely at a slower pace.
Brian Therien, CFA
Investment Strategy
Source: *FactSet, **U.S. Bureau of Economic Analysis, ***CME FedWatch
- Stocks close mixed as NVIDIA pulls back – Stock markets were mixed on Thursday, as NVIDIA earnings disappointed somewhat versus investors' high bar of expectations. The Dow Jones was higher, while the S&P and tech-heavy Nasdaq closed modestly lower. NVIDIA reported quarterly revenue growth of an impressive 122% in the quarter, but this was down from 262% in the prior quarter, indicating that the pace of its stellar gains may be slowing somewhat*. Nonetheless, the stock is up over 140% for the year, despite falling about 8.5% this week thus far. More broadly, the S&P 500 remains higher by over 17% in 2024, driven by a solid fundamental backdrop*. Inflation appears to be moderating, the Fed is likely to cut interest rates in the back half of the year, and the economy is on pace for a soft landing. While stocks may not continue at this pace of gains, and we could see volatility reemerge, we believe that the underpinnings of this bull market remain intact.
- Second-quarter S&P 500 earnings growth delivers – Second-quarter earnings season is nearly complete, with over 98% of S&P 500 companies having reported earnings. Earnings growth is on pace for about 11.3% year-over-year, above the 8.8% growth that was expected at the end of the first quarter*. About 79% of companies have had positive earnings surprises, well above the 10-year average of 74%*. In addition, the sectors with the largest upside surprises to earnings included utilities, health care, and financials, not the typical growth sectors like technology or communication services. While earnings growth has been revised lower for the third quarter and the fourth quarter, overall earnings growth for the full year remains on track for over 10%, well above last year's 1% earnings growth rate*. In our view, the positive and broadening earnings growth this year is one of the key supportive factors driving solid gains in equity markets. We believe there is a reasonable case to be made for double-digit earnings growth in both 2024 and 2025.
- Economic growth for the second quarter is revised higher – In addition to a solid second-quarter earnings season, the revised second-quarter U.S. GDP report released on Thursday also painted a picture of economic growth at or above trend growth rates. Second-quarter GDP growth was revised higher to 3.0% annualized, above the last reading of 2.8%. This was driven by strong consumption growth of 2.9%, well above the prior reading of 2.3%*. In our view, while there are mounting concerns about a cooling labor market and the impact on consumers, the GDP figures point to a U.S. consumer that continues to spend at a reasonable rate, in line with trend levels. Looking forward to the third quarter, the Atlanta Fed GDPNow forecast points to a U.S. GDP growth rate of about 2.0%, also in line with the average of 1.5% - 2.0%*, and certainly not indicating a downturn or recession. We believe as inflation continues to moderate and the Fed begins to lower interest rates, this could perhaps support a reacceleration of consumer and corporate spending in the quarters ahead.
Mona Mahajan
Investment Strategist
Source: *FactSet
- Stocks pull back modestly on tech weakness - There were no major economic releases today, and stocks were little changed early in the day. However, a dip in NVIDIA, which is scheduled to report earnings after the market close, drove a late-afternoon decline, with the growth sectors lagging*. Given the sizable rally over the past two weeks, it is not surprising to see markets digesting the move higher ahead of important catalysts. Aside from the last handful of corporate earnings updates, the Fed's preferred measure of inflation will be released on Friday, and the August employment report is coming out the following Friday. Both of these datapoints will help provide an answer to the question about whether the Fed will cut rates by 0.25% or 0.5% at its September 18 meeting. The U.S. dollar, which has been weakening over the past month, found some support today and rallied after making a new low for the year yesterday*.
- NVIDIA earnings could set the tone - NVIDIA, the company that has been the primary beneficiary of the artificial intelligence (AI) boom and excitement, is scheduled to report earnings after the market close today. Given NVIDIA's significant influence on the S&P 500, now accounting for 7% of index, and the stock's about 160% gain for the year, any upside or downside surprises relative to consensus estimates could produce an outsized reaction, shaping the market narrative for the remainder of the week*. Analysts expect a fourth straight quarter of triple-digit growth, with sales growing 112% and earnings growing 139%, as other mega-cap tech companies like Microsoft, Alphabet, Meta, Amazon and Tesla all spend heavily on NVIDIA’s processing units to develop AI capabilities*. In our view, while innovation is alive and well and supporting the lofty tech valuations, diversification matters too. We think the recent broadening of market leadership is an encouraging development for the sustainability of the bull market.
- August performance: In like a lion, out like a lamb - After a long stretch of market calm, August injected a dose of volatility, which, while uncomfortable, was short-lived. Following a near 10% pullback in the beginning of the month, the first correction this year, stocks have staged an impressive recovery*. Recession fears subsided as quickly as they appeared, while the Federal Reserve has now given the most explicit signal yet that rate cuts are imminent. We wouldn't sound the "all-clear" regarding market volatility, as the next two-month stretch that will lead us to the November election day has historically been seasonally challenging for stocks, with bigger daily fluctuations and lower returns. However, the fundamental backdrop remains positive, in our view. Economic growth and corporate profits are on the rise, while the Fed is about to embark on a multiyear rate-cutting cycle to adjust its policy from restrictive to neutral. Leadership for the month of August reflects this upcoming shift, with a mix of interest-rate-sensitive and cyclical sectors occupying the leaderboard's top five (consumer staples, real estate, health care, utilities, and financials)*.
Angelo Kourkafas, CFA
Investment Strategist
Source: *FactSet
- Equities little changed ahead of tech earnings: Equity markets were little changed on Tuesday, with markets waiting with anticipation for tomorrow's earnings results from technology giants NVIDIA and Salesforce. The S&P 500 and NASDAQ both posted modest gains for the day, while the Dow closed near the flatline.* From a leadership standpoint, the technology and financials sectors were the top performers of the S&P 500, while the energy sector lagged in response to a decline in oil prices.* On the macroeconomic front, The Conference Board's Consumer Confidence Index was better than expected for August, rising to 103.3 versus expectations for a reading of 100.* Additionally, average consumer inflation expectations over the next 12 months declined to 4.9%, which is the lowest reading since March 2020.* Bond yields were little changed, with the U.S. 10-year yield closing around 3.83%, while the 2-year yield finished around 3.90%.* After a sharp move higher yesterday, oil prices closed lower on Tuesday, with crude oil ticking down to under $76 per barrel.*
- Tech earnings in focus as earnings season winds down: Corporate earnings will remain in the spotlight this week, with technology giants NVIDIA and Salesforce scheduled to report after the market close Wednesday. Consensus expectations are for NVIDIA to post earnings per share of $0.65, which, if achieved, would equate to year-over-year earnings growth of roughly 140%, while Salesforce is expected to grow earnings per share by roughly 11%.* Given that the technology sector comprises nearly one-third of the S&P 500, tomorrow's results could set the tone for markets the remainder of the week. At an index level, second-quarter earnings have been strong. Roughly 96% of companies in the S&P 500 have reported second-quarter results, with 79% of those companies exceeding earnings expectations.* Additionally, S&P 500 earnings per share are on pace to grow by 10.8% year-over-year in the second quarter, which, if achieved, would be the strongest quarterly growth rate since the fourth quarter of 2021.* With valuations rich relative to history, healthy corporate profit growth will likely be a necessary ingredient for continued strength in equity markets. To that end, we believe that ongoing economic growth, strong labor-productivity gains, and Fed rate cuts in the months ahead should be supportive to corporate profits.
- Markets eye key inflation data: In addition to corporate earnings, inflation will also be front and center for markets this week, with the release of July personal consumption expenditures (PCE) inflation on Friday. Expectations are for the headline index to gain 0.2% for the month and 2.6% on a year-over-year basis, while core PCE is expected to show a 0.15% monthly gain and rise by 2.7% year-over-year.* After a string of hotter-than-expected inflation readings in the first quarter, inflation has trended lower in recent months, with the three-month annualized rate of change in core PCE falling to 2.3% after the June reading.* Lower inflation combined with softening labor-market conditions has revamped market expectations for Fed rate cuts, with futures markets pricing in the first cut at the September 17-18 meeting and a total of roughly 100 basis points (1%) of Fed rate cuts by year-end.* In our view, the combination of Fed rate cuts with ongoing positive economic growth should be supportive to equity markets in the months ahead.
Brock Weimer, CFA
Associate Analyst
Source: *FactSet