Last Wednesday the S&P 500 saw the biggest one-day pullback since December of 2022, snapping a 356-day streak without a 2% or more decline. The Magnificent 7 were down 5.5% after reporting lackluster earnings compared to expectations. Yet, the S&P 500 still managed to recover most of the loss and ended the week only down -0.82%. With a bit of rotation from the Magnificent 7 toward the broader market, the Dow Jones Industrial Average (DJIA) gained 0.77% for the week. Meanwhile, small companies were the stars of the show last week with the S&P 600 Small-cap Index up 3.55% driven by rising expectations for near-term rate cuts.

There was some talk last week suggesting the Fed could start to lower interest rates in the July meeting this week, but solid economic growth and low unemployment numbers may keep the Fed from starting to drop rates just yet. The Q2 GDP came in at 2.8%, much stronger than the expected 1.9% and Q1’s final 1.4%. Higher consumption and inventory build were the main drivers of outperformance. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose to 2.5% year-over-year, in-line with expectations. Core PCE went up 0.2% month-over-month for an annual reading of 2.6% year-over-year. In unemployment news, initial claims came in at 235K, which was lower than the consensus of 239K and the prior week’s upwardly adjusted 245K. Continuing claims reported at 1,851K compared to an expected 1,868K and a downwardly adjusted previous week of 1,860K.

June existing home sales fell 5.4% from the previous month and came in lower than expectations. Economists from the National Association of Realtors said there seems to be a shift from seller’s market to buyer’s market with homes sitting longer and sellers receiving fewer offers. Unsold inventory is the highest since May of 2020. High mortgage rates and prices caused new home sales to decline to a seven-month low in June. At 617.0K it came in lower than expectations of 635.0K and the previous month’s 621.0K. The year started strong, but lost ground in May the most in nearly a year. While thirty-year mortgage rates are now under 7%, they are still double what they were just a few years ago at the end of 2021.

The July reading of the S&P Purchasing Managers Index (PMI) provided more evidence of generally robust economic conditions but with some pockets of weakness. The overall composite PMI came in at 55.0, the highest since April 2022. It was in-line with consensus expectations and slightly higher than June’s reading of 54.8. The Manufacturing PMI was down slightly to 49.5 compared to expectations and the previous reading of 51.6. It was the first drop for the goods production measure since December. Services came in higher than the expected 55.0 with a reading of 56.0. The average prices charged for goods and services rose at the slowest rate since January.

Corporate earnings season continues with somewhat disappointing results from some of the Magnificent 7 names such as Alphabet and Tesla. While Alphabet showed better than expected revenue and operating income, concerns of concentration, slowing growth and elevated AI capex are weighing on investors’ minds. Visa lost ground reporting a slowdown in July volumes to +4% down from June’s +5.0% along with some incremental softening in the low-income consumer segment.

This week is the FOMC meeting and while the Fed is not expected to lower rates at this meeting, all will be listening for any comments to see if the next meeting in September brings the first rate cut. In addition, July payrolls and employment numbers come out on Friday. Unemployment is expected to stay the same at 4.1%.