Weekly Investment Perspective

The major U.S. equity indexes closed out a turbulent week almost flat with where they began after recovering from a sharp sell-off when markets opened on Monday. The S&P 500 Index neared correction territory (down over 10%) on Monday morning, when it fell as much as 9.71% from its intraday high in mid-July; around the same time, the Nasdaq Composite was down 15.81% from its peak, after entering a correction the previous Friday. More pronounced were the swings in the CBOE Volatility Index (VIX), Wall Street’s fear gauge, which briefly spiked Monday above 65, its highest level since late March 2020, before falling back to end the week at 20.69. Government bond yields were lower, with the 10-year Treasury yield falling below 4%, as markets continue to price in a more aggressive Fed easing cycle.

So, what happened? After markets panicked about the economy following a weak July jobs report and traders reacted to a surging Japanese yen on Monday, things calmed down significantly in the ensuing days. Thursday’s report of weekly jobless claims helped spark a substantial portion of the market's rebound as unemployment filings fell more than expected (dropping by 17k from the prior week to 233k), which eased concerns of a deteriorating labor market. Part of the recent uptick in unemployment claims were likely driven by temporary factors like Hurricane Beryl and summer auto plant shutdowns that are receding. While the claims reading helped market participants breathe a sigh of relief, labor market data is softening as employers dial back job openings and will remain a focal point for investors in the weeks and months ahead.

Aside from the positively received jobless claims data, several measures of the sustained health of the U.S. service sector in July also helped to calm investor nerves. S&P’s gauge of services sector activity fell slightly in July to 55.5 from 56.0 in June but remained solidly in expansion territory (readings above 50.0 indicate expansion)—rounding out its best three-month growth in two years, according to its chief researcher. Likewise, the Institute for Supply Management’s rival gauge of service activity bounced back from a contractionary 48.8 in June—its lowest reading in over three years—to 51.4.

On the corporate earnings front, the second quarter corporate earnings season is winding down this week as over 91% of the members of the S&P 500 have reported results. According to FactSet's latest Earnings Insight report, the blended earnings growth rate for Q2 S&P 500 EPS currently stands at 10.8%. This compares to the 8.9% expected at the end of the quarter. The blended revenue growth rate is 5.2%. Of the S&P 500 companies that have reported for Q2, 78% have beaten consensus EPS expectations.

For the week ahead, investors will be looking forward to the release of Producer Price Index (PPI) data Tuesday and the Consumer Price Index (CPI) on Wednesday to see if inflation continues to moderate. Economists broadly expect that core CPI decelerated to 3.2% year-over-year in July from 3.3% in June. Retail sales follow on Thursday morning and will give an updated read on the health of the U.S. consumer.