Last week was volatile in the stock market but ended on a strong note, thanks to stronger-than-expected economic growth in the second quarter and a key inflation measure holding steady from the previous month. With the strong gains on Friday, the S&P 500 managed to recover some of its earlier losses, though it still ended the week down by almost 1%. The tech-heavy NASDAQ lost over 2% for the week. However, small-cap stocks gained 3%, continuing the rotation into smaller companies. Since July 10th, when this rotation began, small caps have outperformed the S&P 500 by over 12%. For the week, interest rates moved lower, with ten-year Treasury yields ending the week at 4.20%.
Regarding economic growth, there were two notable positive developments last week: GDP and corporate earnings growth. The first estimate of 2Q GDP came in at 2.8%, significantly higher than the 1.9% consensus expectation. Most of this growth was driven by an increase in consumer spending, with a surprising boost from business investment in equipment. On the corporate earnings front, according to FactSet's latest Earnings Insight report, the blended earnings growth rate for Q2 S&P 500 EPS currently stands at 9.8%. This is an improvement from last week and better than the 8.9% expected before earnings season. If this growth rate holds, it will be the best quarter for year-over-year earnings growth since 4Q21.
Looking ahead, this week features the Federal Reserve meeting (July 31st). It is widely expected that the Fed will not change rates at this meeting, as markets are anticipating a rate cut at the September meeting. Additionally, Friday brings the latest update on the unemployment rate. While job growth has remained respectable, the unemployment rate has been creeping higher, raising concerns among economists that a gradual increase in unemployment could lead to a sharp rise.
This week is also significant for earnings reports, with four of the "Magnificent 7" companies — Apple, Microsoft, Amazon, and Meta (Facebook) — reporting their results. These updates will be crucial for insights into the prospects of artificial intelligence, which has been a key driver of the overall stock market this year. However, enthusiasm for AI has dipped in recent weeks. Will these earnings updates reignite investor enthusiasm? This will be a key item to watch.
And speaking of watching, this week will also see a lot of attention on the summer Olympics. Go Team USA!
In summary:
Stay 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!