U.S. and International Equities
Markets Finish Marginally Higher
The major markets reversed course from last week, finishing the week higher. Overseas markets produced gains, as emerging market equities (MSCI EM) rebounded from last week’s selloff. The utilities and financials sectors had good weeks as the banks enjoyed a solid Friday as the better than expected jobs report pushed yields higher amid increasing optimism about the outlook for the U.S. economy.
Earnings and Market Valuation
Second quarter earnings are, thus far, nothing short of exemplary, with record-setting percentages of companies beating earnings and revenue projections. The almost 90% expected S&P 500 earnings growth rate for the second quarter is the second highest that FactSet has ever recorded, behind only the fourth quarter of 2009 after the Great Recession, which was over 100%. Moreover, this is the fifth consecutive quarter with rising estimates during the first month of reporting season.
Market participants have expressed concerns with higher-than-normal price to earnings (P/E) ratios. The S&P 500 forward price-to-earnings ratio (PE) at 21 is well above the historical average of approximately 16. Nevertheless, considering this quarter’s strong earnings results, along with a 10-year Treasury yield of just under 1.3%, and a forward earnings yield for the S&P 500 at over 4.5%, S&P 500 stocks could be seen as being fairly valued given an equity risk premium of over 3%.
Fixed Income and Commodities Recap
Core Bonds Hold Their Own As Energy Has a Second Straight Volatile Week
The Bloomberg Barclays US Aggregate Bond Index gained marginal ground this week as yields declined. Moreover, high yield bonds, as denoted by the Bloomberg Barclays High Yield Bond Index, finished the week lower, while yields increased. Oil lost approximately 8% this week while natural gas rebounded over 5% from last week’s losses. In addition, gold, silver, and copper ended the week lower with both gold and silver down for the year.
Economic Weekly Roundup
Strong Jobs Report; Supply Chains Challenged
The major news this week is the better than expected jobs report. The economy gained almost 950,000 jobs in July, surpassing the Bloomberg consensus. The unemployment rate fell to 5.4%, a big beat relative to expectations, and was paired with a slight uptick in the labor force participation rate, which moved to 61.7% from 61.6%.
“This was a great jobs number,” explained LPL Financial Chief Market Strategist Ryan Detrick. “With the 10-year Treasury Bond yield higher, this was a good end of the week bounce for both financials and value.”
Supply chain disruptions and labor shortages were mentioned as challenges in the most recent purchasing managers’ reports. The Institute for Supply Management July Manufacturing Purchasing Manager’s Index (PMI) missed estimates while Markit’s PMI rose slightly higher than expected.
Other highlights from this week’s economic calendar include:
- Payroll Processor ADP reported that U.S. companies added only 330,000 jobs in July, which was well-below the Bloomberg consensus and turned out to be out of sync with the government’s tallies.
- Initial unemployment claims were reported near economists’ expectations at 383K, down from 399K the prior week and near pandemic lows.
- Continuing unemployment claims were a bright spot this week where over 2.9 million claims were reported. This was the first reading below 3 million since mid-March 2020.
Next week, the following economic data is slated to be released:
- Monday: U.S. Bureau of Labor Statistics Job Opening and Labor Turnover Survey June job openings
- Tuesday: Q2 unit labor cost and productivity statistics and National Federation of Independent Business July Small Business Index
- Wednesday: July Consumer Price Index (CPI), hourly earnings, workweek statistics, and Treasury budget
- Thursday: Weekly initial and continuing unemployment claims, July Producer Price Index (PPI)
- Friday: August University of Michigan Consumer Sentiment, July Export/Import prices
Earnings season winds down next week with just 12 companies reporting Q2 results.
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