U.S. equities managed to eke out small gains last week despite some mid-week turbulence as expectations for near-term economic growth have moderated a bit, in part due to continued labor shortages and supply chain bottlenecks, alongside concerns on new Covid-19 variants. For the week, the S&P 500 and Nasdaq Composite each notched 0.4% gains while the Dow Jones was up 0.3%. Meanwhile, long-term interest rates have tumbled in recent weeks with the 10-year Treasury yield closing out last week at 1.3%, down from 1.5% a month ago and the first quarter high of 1.75%. Tech stocks have been a beneficiary over the last month of slumping interest rates and moderating growth expectations as market participants rotated out of economically sensitive cyclical sectors, like energy and financials, in favor of technology companies whose growth is less leveraged to the state of the overall economy.
The status of the labor market continues to be a large area of focus for investors as job openings have hit an all-time high per last week’s Job Openings and Labor Turnover Survey, which reported 9.2 million job openings in May. A record 46% of small businesses are reporting difficulty filling open positions, according to a survey from the NFIB. The high demand stands in stark contrast to an elevated unemployment environment with 9.5 million people looking for work and over 7 million fewer people employed than pre-pandemic levels. Investors will be watching closely for rising hiring traction into September, when remaining enhanced unemployment benefits expire and more kids head back to school in person.
However, there are also several factors contributing to a disconnect between hiring needs and labor supply that may lead to a more drawn out employment recovery and put upward pressure on wages. Many people relocated during the pandemic, especially away from dense urban areas where a lot of recovering service jobs are in growing demand. And aside from a geographic mismatch, there is a skills mismatch in some cases where job opportunities have shifted as a result of the pandemic (such as more demand for delivery and fulfillment roles) and it will take time to retrain available workers. Additionally, job seekers have greater leverage and flexibility in pursuing the roles and wages that they desire due to pandemic stimulus support and a notable jump in savings, which is demonstrated by a record number of workers voluntarily leaving jobs right now. For investors, it will be important to watch wage pressure, with average weekly earnings up about 7.5% from pre-pandemic levels, which could weigh on corporate profit margins or underpin rising prices.
In the week ahead, banks will begin to kick off a highly anticipated second quarter corporate earnings season. Earnings for the S&P 500 are expected to have grown 64% compared to their depressed levels from the second quarter of 2020, which would be the best performance since the fourth quarter of 2009 when earnings grew almost 110% year-over-year. Cyclical sectors including financial services, energy, industrials, and consumer discretionary are expected to lead the way in year-over-year growth as the hardest hit areas of the pandemic lockdowns. Compared to the second quarter of 2019, this quarter’s earnings are expected to be up almost 13%. The bar has been set high for this quarter and market participants will be closely watching how well companies clear expectations and address labor and supply constraints.
