Last week, the S&P 500 finished slightly higher, maintaining its monthly gain, and marking the fourth consecutive month of increases. Positive economic news was a key driver, contributing to strong performances from more cyclical stocks, such as value and small caps. Another significant factor was Nvidia's earnings report. Although Nvidia reported a positive earnings surprise, the results were not as robust as some investors had hoped. As a result, Nvidia's stock declined, pulling growth stocks down with it, and other AI-related stocks experienced even steeper losses.
Overall, it has been a solid quarter for the stock market. Interestingly, the strong relative performance driven by AI stocks has stalled since mid-July. Since then, the "Magnificent 7" stocks have dropped over 10%, while the other 493 stocks in the S&P 500 have gained around 4%. Over 70% of stocks have had better returns than the S&P over this time. Value and small-cap stocks have notably outperformed this quarter. In the bond market, 10-year Treasury yields rose slightly last week from 3.8% to 3.9%. Despite this, bonds have had a good quarter, and their one-year returns have recently shown notable improvement.
Regarding economic data, the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, decreased to a 2.6% year-over-year growth rate, slightly better than the expected 2.7%. Additionally, second-quarter inflation-adjusted GDP, which reflects the overall growth of the economy, was revised upward to a 3.0% annual rate from a prior estimate of 2.8%. This revision was primarily due to stronger personal consumption. It should also be noted that third quarter GDP is currently estimated to be 2.5% according to GDPNow from the Atlanta Fed. In short, the overall economy and consumer spending remain resilient. Lastly, and most importantly for equity investors, the second-quarter earnings season was solid, with year-over-year earnings growth at its best levels since the fourth quarter of 2021.
Looking ahead, the key economic report this week will be the non-farm payrolls update on Friday. Expectations are for over 160,000 new jobs to be created and for the unemployment rate to drop to 4.2% from 4.3%. This report will likely influence the Federal Reserve's decision on rate cuts at their next meeting on September 18th. Currently, the market anticipates a quarter of 1% rate cut, with a nearly one-third chance of a half 1% cut.
As we move into September, trading volumes are expected to pick up as investors return from the summer holidays. Historically, September has been one of the weaker months for the stock market, having declined in the last four Septembers with an average loss of nearly 6%. After four months of consecutive gains and a year-to-date return approaching 20%, a brief market pause would be considered both normal and healthy.
In summary:
Remain invested. Stay diversified. Stay disciplined.
If you have any questions or comments, please let us know at strategists@brinkercapital.com or at rusty@orion.com. Thank you for your time and trust. See you next week!